Working Paper: NBER ID: w18138
Authors: Joshua Aizenman
Abstract: This paper analyzes reforms and adjustments in the context of the Euro and the global financial crises. Taking the perspective of the evolutionary approach to institutions, the formation of a new currency area is not unidirectional. The process leading to the euro is an example of a common upbeat and optimistic attitude to the formation of new institutions. Such a Panglossian attitude to policies may reflect built-in fiscal myopia, possibly both at the level of the principal [the policy maker] and of the agents [consumers and households]. Next, the paper reviews the evolution of institutions buffering the stability of unions in the aftermath of crises, where fiscal restraints and the allocation of significant bargaining clout to the Federal Center increase the stability of a union. The paper concludes with an overview of the challenges associated with finding the proper balance between financial integration and financial regulations.
Keywords: No keywords provided
JEL Codes: F02; F33; F34; F36
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| institutional framework inherited from national central banks (E58) | confidence in the currency (F31) |
| fiscal restraints (E62) | stability of the euro project (F36) |
| allocation of bargaining clout to a federal center (H77) | stability of a union (C62) |
| institutional reforms (O17) | economic stability (E63) |
| failure to implement fiscal discipline (H69) | destabilization of the euro (F31) |
| historical context of euro formation (N14) | challenges faced by the euro (F36) |
| asymmetric shocks (F41) | risks to euro project (F31) |