Abstract
Following De Grauwe (2016), this research advances the idea according to which economies that are part of a monetary union issue debt in a medium of exchange they cannot control: financial markets develop the capacity to impose default on such economies. We are interested in how previous research analyzed the notion that, when economies are autonomous and they employ the exchange rate as a vehicle to handle asymmetric shocks, they confront comparable constraints on the performance of exchange rate strategies. When a monetary union is affected by significant asymmetric shocks, the member economies have to deal with tough adjustment issues. Empirical and secondary data are used to back the assertion that, in a monetary union, economies that are affected by long-lasting asymmetric demand shocks demand wage elasticity and labor flexibility to rectify for them, and if the latter generate substantial budget deficits, financial markets tend to intensify the consequences of the asymmetric shocks, boosting the demand for severe regulation of wages and labor flexibility. Our article makes conceptual and methodological contributions to the view that member economies of a monetary union are exposed to varying market reactions, generating more volatility in the business cycle: an economy undergoing a recession and a rise in the budget deficit might be affected by wide-ranging transactions of its government bonds, causing a liquidity crisis and superior interest rates, and possibly coercing the government of that economy to adopt budgetary austerity measures, thus intensifying the recession.
Highlights
Monetary economics operates with a specific methodological system, within which special attention is paid to the concepts regarding the monetary area (MA) and the “optimum” monetary area (OMA), due to the implications of such theoretical views upon providing macroeconomic stability and sustainable development
The coexistence of the currencies, usually the national ones, the emergence of new coins, the removal of others for more or less justified reasons, and the variation of the circulation space in time are all evidence of the fact that the currency is a product of the historic dynamics, dependent on a plethora of technical, social, political and economic factors, along with geographical that are already presumed from the start
The monetary zone (MZ) is linked to currency, as it can be defined as a multidimensional space hosting the manifestations of all the tender’s issuers and users, where this space turns to be approximately homogeneous or unitary from a geographic viewpoint—it is possible for one currency that circumscribes the same liberating properties circulate among economic and social agents located on different territories
Summary
Monetary economics operates with a specific methodological system, within which special attention is paid to the concepts regarding the monetary area (MA) and the “optimum” monetary area (OMA), due to the implications of such theoretical views (and ) upon providing macroeconomic stability and sustainable development. The respective space can be heterogeneous (non-homogeneous) from a political perspective, in the sense that the same currency is used by economic and social agents belonging to distinct political entities. This has been the leitmotif in the entire history of the human society, during the time of formation of the first nation-states in Europe, when gold was the payment means recognized by all participants in the economic transactions. Our recommendation is for a possible application of the OMZ theory precepts to the issue of the space, territorial, and regional development
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