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The Fragility of Two Monetary Regimes: The European Monetary System and the Eurozone
Author(s) -
De Grauwe Paul,
Ji Yuemei
Publication year - 2015
Publication title -
international journal of finance and economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.505
H-Index - 39
eISSN - 1099-1158
pISSN - 1076-9307
DOI - 10.1002/ijfe.1500
Subject(s) - fragility , economics , financial fragility , monetary policy , financial system , monetary economics , government bond , government (linguistics) , international economics , financial market , lender of last resort , financial crisis , central bank , keynesian economics , finance , interest rate , linguistics , chemistry , philosophy
We analyse the similarities and the differences in the fragility of the European Monetary System (EMS) and the Eurozone. We test the hypothesis that in the EMS, the fragility arose from the absence of a credible lender of last resort in the foreign exchange markets; whereas in the Eurozone, it was the absence of a lender of last resort in the long‐term government bond markets that caused the fragility. We conclude that in the EMS, the national central banks were weak and fragile, and the national governments were insulated from this weakness by the fact that they kept their own national currencies. In the Eurozone, the roles were reversed. The national central banks that became part of the Eurosystem were strengthened. This came at a huge price, that is, the fragilization of the national governments that could be brought down by the whims of fear and frenzy in financial markets. Copyright © 2014 John Wiley & Sons, Ltd.