Working Paper: CEPR ID: DP471
Authors: Richard Baldwin; Richard Lyons
Abstract: It is often suggested that "European economic and monetary integration is important because people think it is". This paper is an exploratory attempt to formalize this idea. As the basis for our investigation, we rely on recent analysis by Krugman (1989) and Matsuyama (1989), which addresses the process of equilibrium determination in a stylized economy in which more than one equilibrium is possible. As an additional dimension, we also address potential implications for unemployment using the unemployment hysteresis model of Blanchard and Summers (1986).
Keywords: self-fulfilling expectations; external economies; european integration
JEL Codes: 423; 821; 111
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| self-fulfilling expectations (D84) | economic outcomes (F61) |
| expectation of manufacturing sector expansion (L60) | building of factories (N60) |
| expectation of manufacturing sector expansion (L60) | development of technologies (O39) |
| expectation of manufacturing sector expansion (L60) | hiring of workers (J63) |
| pessimism (D84) | lack of investment (E22) |
| pessimism (D84) | lack of hiring (J23) |
| shift from pessimism to optimism (P27) | reduction in unemployment (J68) |
| shift from pessimism to optimism (P27) | economic outcomes (F61) |