Download Global Shocks, Global Financial Crises: How can small open economies like

Global Shocks,
Global Financial Crises:
How can small open economies like
New Zealand protect themselves?
An Historical Perspective
Michael D. Bordo
Rutgers University
National Bureau of Economic Research
2009 Professorial Fellow in Monetary
and Financial Economics at the
Reserve Bank of New Zealand and
Victoria University
7/12/2010
Lecture at Victoria University of Wellington
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Global Shocks, Global Financial Crises: How can small
open economies like New Zealand protect themselves?
An Historical Perspective
Introduction




The world can be a large and dangerous place for a small open
economy like New Zealand in the face of global shocks.
At present we are coming out of just this type of event – a financial
crisis which started with subprime mortgages in the U.S., spread
through derivatives to the global banking system and led to a credit
crunch and a global recession.
The shocks that New Zealand has recently faced in an environment of
increasing globalization have resonance to the first era of globalization
in the years 1880-1914.
Globalization has been associated with an increased incidence of
financial crises, banking crises, debt crises and sudden stops.
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Introduction

With globalization business cycles have become increasingly
synchronized across countries.

They have been connected by common global shocks which are often
financial.

In such an environment a small open economy can be hit hard by
financial crises leading to recessions.

It can also be hit by real shocks that reduce the terms of trade and the
volume of its exports.

What factors can prevent global shocks from being so damaging?
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Introduction


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This lecture provides summary evidence for a panel of countries from
1880 to the present on the incidence of various types of financial crises
and on the international synchronization of business cycles.
It then summarizes evidence on the determinants of various types of
crises.
Based on this research we can isolate variables that can attenuate the
impact of shocks. These include macro fundamentals and institutional
variables.
We then turn to the case of New Zealand. We consider how it fared
within the historical context of global financial crises.
The record suggests that New Zealand did quite well in avoiding serious
financial stress as did other countries with sound institutions and
policies.
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Introduction


Unlike financial crises, New Zealand has been significantly affected by
global real shocks, especially terms of trade shocks and declines in
exports consequent upon foreign recessions.
In reaction to the massive global shocks in the 1930s, New Zealand
shifted to a policy of insulationism, instigating a wide range of controls
within the context of the Bretton Woods pegged exchange rate regime.

This approach may have provided some insulation but at the expense
of a slower growth rate.

Many of the controls were rolled back in the mid 1980s along with the
abandonment of pegged exchange rates.

The subsequent liberalized financial regime with floating exchange rates
exposed New Zealand again to global financial shocks but the floating
exchange rates may have provided some insulation from their real
effects.
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Road Map
1.
Introduction
2.
Some facts on crises and the international synchronization of business
cycles
3.
Evidence on the determinants of crises for 30 countries
4.
New Zealand’s experience with crises
5.
New Zealand’s experience with global real shocks
6.
Policy lessons
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2. Some facts on crises
2.1 Banking and Currency Crisis 1880 to 1997
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As background I present evidence on the incidence of financial crises.
Bordo, Eichengreen, Kliengebiel, and Martinez-Peria(2001), provide
evidence for a panel of 21 countries for 120 years and 56 countries
for the 4 recent decades on: the frequency, duration and severity of
currency, banking and twin crises across 4 policy regimes.
We compare output losses and recovery times in crises with their
counterparts in recessions where no crises occurred.
We define financial crises as episodes of financial turbulence leading
to distress – significant problems of illiquidity and insolvency—
among major financial market participants and/or to official
intervention to contain those consequences.
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2. Some facts on crises
2.1 Banking and Currency Crises 1880 to 1997

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We identified currency crisis dates using an “exchange market
pressure” measure and, alternatively, survey of expert opinion. We
use the union of these indicators and an EMP cutoff of 1.5 standard
deviations from the mean.
For banking crises, we adopted World Bank dates for post-1971
period, and used similar criteria (bank runs, bank failures, and
suspensions of convertibility, fiscal resolution) for earlier periods.
Twin crises: banking and currency crises in same or consecutive
years. Crises in consecutive years counted as one event.
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We distinguish four periods:

1880-1914: prior period of financial liberalization and globalization

1919-1939: period of exceptional currency, banking and macro
instability

1945-1971: Bretton Woods period of tight regulation of domestic
financial systems and of capital controls

1973-1998: second period of financial liberalization and globalization
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Frequency of Crises
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We divide the number of crises by the number of country year
observations in each sub-period. (See Figure 1.)

Alarmingly, all crises appear to be growing more frequent.
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Crisis frequency of 12.2% since 1973 exceeds even the unstable
interwar period and is three times as great as the pre 1914 earlier
era of globalization.
Results driven by currency crises, which have become much more
frequent in recent period.
This challenges the notion that financial globalization creates
instability in foreign exchange markets since pre 1914 was the
earlier era of globalization.
May be due to a combination of capital mobility and
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democratization.
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Figure 1 Crisis Frequency
(per cent probability per year)
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Frequency of Crises
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In contrast, incidence of banking crises only slightly larger than prior
to 1914, while twin crises more frequent in the late twentieth
century.
Note that interwar period had highest incidence of banking crises.
Bretton Woods period was notable for the absence of banking crises
due to financial repression.
A comparison of crisis frequency between emerging and industrial
countries (see Figure 2), suggests that with the exception of the
interwar period, the majority of crises occurred in the emerging
countries.
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Figure 2 Frequency of Crises – Distribution by Market
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Duration of Crises

We define the duration of crises as the average recovery time. The
number of years before the rate of GDP growth returns to its 5-year
trend preceding the crisis. (See Table 1.)

Recovery time today for currency crises is longer than preceding 2
regimes but shorter than pre 1914.

Banking crises last not much longer now than in earlier periods.

Recent period twin crises produce the longest slump for emerging
markets.

The dominant impression from comparison of pre 1914 and today
for all crises is how little has changed.

To the extent that crises have been growing longer, we have simply
been going back to the future.
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Table 1 Duration and Depth of Crises
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Depth of Crises
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We calculate the depth of crises by calculating, over the years prior
to full recovery, the difference between pre-crisis trend growth and
actual growth. (See Table 1 – which shows cumulative output loss
as a percentage of GDP.)
We find that output losses from currency crises were even greater
before 1914 than today. The difference is most pronounced for
emerging countries.

Output losses from banking crises also greater in pre 1914 regime
than today.

Twin crises show comparable output losses for today and pre-1914
for emerging markets.

Key unsurprising fact is the large output losses in the interwar from
both currency and twin crises.
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2.2 Evidence on Debt Crises and
Sudden Stops

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I have extended the historical comparisons to include Debt Crises
(1880–1913 versus 1972-1997) (Bordo and Meissner 2006) and
Sudden Stops (1880-1913 versus 1980-2004) (Bordo, Cavallo, and
Meissner 2009). See Figures 3 and 4.
In terms of output losses, sudden stops were less serious than other
crises but when combined with other financial crises the results are
dramatic.
Sudden stops associated with crises produced 10 to 12 times
greater collapses in growth than those not associated with crises.
See Table 2.
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Figure 3 Crisis Frequency in Percentage Probability per Year
1880-1913 vs. 1972-1997
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Figure 4 Frequency of Different Types of Crises 1880-1913
In percent probability per year
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Table 2 Sudden Stops and Financial Crises
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2.3 Evidence on Contagion

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Contagion refers to the bunching of crises in several countries.
See Figures 5 and 6 which show the countries affected by crises in
the same year from the sample of countries in Bordo et al (2001).
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Figure 5 Countries Affected by Crises
From a Sample of 21 Countries, 1880-1914
Source: Bordo and Eichengreen (1999)
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Figure 6 Countries Affected by Crises
From a Sample of 21 Countries, 1919-1939
Source: Bordo and Eichengreen (1999)
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


Carmen Reinhart and Kenneth Rogoff (2008) have extended the
data base of financial crises in Bordo et al (2001) to include many
more countries, to include episodes back to 1800 and forward to
2008.
The incidence of banking crises they show in Figure 7 (the
proportion of countries with crises weighted by their shares of
income) presents a pattern for banking crises which echoes that in
Bordo et al (2001), with the highest incidence in the interwar and a
recurrence of crises since the early 1970s.
The recent episode promises to be as severe as the crises of the
1990s.
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Figure 7 Proportion of Countries with Banking Crises, 1900-2008
Weighted by Their Share of World Income
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2.4 Evidence on the
Synchronization of Business
Cycles

Bordo and Helbling (2009) find that synchronization based on
bilateral correlations for log output growth shows higher positive
correlation coefficients across the four exchange rate regimes. See
Figure 8.
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Figure 8 Bilateral Output Correlation Coefficients by Percentile
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2.4 Evidence on the
Synchronization of Business
Cycles

This pattern is largely driven by a sequence of global shocks that
occur during periods of worldwide downturns. See Figure 9.
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Figure 9 Global Shocks, 1887-2008
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Figure 9 Global Shocks, 1887-2008
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2.4 Evidence on the
Synchronization of Business
Cycles

These common shocks are related to a global financial conditions
index based on the first principal components of a cross-section of
financial indicators. See Figure 10.
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Figure 10 Global Financial and GDP Shocks, 1887-2001
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Figure 10 Global Financial and GDP Shocks, 1887-2001
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3. The Determinants of Crises
3.1 A Framework linking Integration to Crises and
Crises to Growth


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Our framework for thinking about financial crises follows Mishkin
(2003) and Jeanne and Zettelmeyer (2005). This view follows an
open-economy approach to the credit channel transmission
mechanism of monetary policy.
Balance sheets, net worth and informational asymmetries are key
ingredients in this type of a framework.
See Figure 11.
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Figure 11 A Crisis Framework
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The Chain of Logic: Crises

Real shocks (rise in international interest rates) transmit into the
Banking system.

Worsens banking sheets. Reduces lending.

Capital Flows Reverse.

Reserves decline/currency crisis or devaluation.

Crisis could be prevented with LLR, financial depth, credible peg,
fiscal probity.

Sudden stops or devaluation could adversely affect balance sheets if
original sin present.
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The Chain of Logic: Crises

Scenario worse if country is financially fragile/underdeveloped.

Depends on the currency mismatch.

Possibility of debt crisis and default depends in part on fiscal control
and political system.

Accordingly to Kohlcheen (2006) presidential democracies were
more likely to default than parliamentary democracies.
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Evidence
3.2 Sudden Stops
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
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Bordo, Cavallo and Meissner (2009) find evidence on the
determinants of sudden stops 1880-1913 for 30 countries including
New Zealand. Their results are similar to those of Calvo et al (2004)
for the recent period.
Their results from a panel probit show that countries which are
open, have lower levels of original sin (hard currency debt relative
to total debt) and have strong fundamentals have lower
probabilities of being hit by a sudden stop.
They also found based on a treatments effects growth regression
that sudden stops reduces growth by close to 5% from the long-run
average growth rate.
Sudden stops that accompany financial crises reduce growth
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considerably.
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3.3 Currency Crises
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Bordo and Meissner (2009) using a panel probit for 30 countries
(including New Zealand) 1880-1913 find that a large positive change
in the current account to GDP and low levels of reserves to notes
are associated with high probabilities of a currency crisis.
Currency crises were driven by current account reversals and
sudden stops.
High levels of original sin and a low foreign currency debt mismatch
also lead to currency crises.
For the 1972-2003 period results are similar.
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3.4 Banking Crises
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Bordo and Meissner (2005) find that a key determinant of banking
crises 1880-1913 was original sin.
But countries with a high level of original sin like the British
dominions and Scandinavia have a low probability of banking crises.
Countries like Argentina and Italy with a moderate amount of
original sin were crisis prone.
The key difference between the two groups of countries is poorer
fundamentals and lower financial development . Also the risk of
crisis is offset by having sufficient hard currency assets to match
hard currency liabilities.
For the 1972-97 period Bordo and Meissner (2006) find that original
sin and a high mismatch is associated with a greater chance of a
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banking
crisis
but
that
countries
with higher income can avoid
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crises.

3.5 Debt Crises


The likelihood of debt crises in both eras of globalization increases
significantly with the level of foreign currency debt exposures but in
the pre 1914 era countries with sound fundamentals like the British
dominions were less exposed.
Institutional factors include a low level of currency mismatch,
adherence to the gold standard, and being a Parliamentary
democracy.
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3.6 The Bottom Line
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Debtor countries with sound fundamentals and institutions could
avoid financial crises.
In the first era of globalization countries like the British dominions,
Sweden and Denmark with very high ratios of foreign currency debt
to total debt could avoid crises by having high export receipts in
foreign currency or large international reserves.
They also had “country trust” (Caballero Cowan and Kearns 2006)
based on sound institutions, the rule of law and stable political
systems.
Key institutional factors were the commitment and ability to
maintain adherence to the gold standard in the British dominions.
For example, New Zealand banks held large sterling asset positions
in London. Many dominion debt issues had the guarantee of the
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3.6 The Bottom Line
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By contrast other countries like those in Latin America and Southern
and Eastern Europe that embraced global financial flows but did not
adequately fortify their financial systems faced severe financial
crises enveloping the banking system, the currency and the national
debt.
In the recent era high per capita income countries with high original
sin like New Zealand have limited exposure to capital account crises.
The countries most exposed to such crises were middle income
emerging countries with high original sin. Their fragility to current
account reversals and crises was evident in the 1990s.
Today countries like Iceland, the Baltics and some eastern European
countries are in the same boat.
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4. New Zealand: Financial Crises

New Zealand has had a relatively benign crisis experience.

Table 3 contains a chronology of New Zealand’s financial crises.

New Zealand experienced 2 banking crises, 7 currency crises, 8
sudden stops, no debt crises or twin crises.
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4. New Zealand: Financial Crises
Table 3 A Chronology of New Zealand Crises *
Banking
Currency
Sudden Stops
1886-1890
1890-1895
1931,33
1938
1967
1974-75,79-80
1984
1987-1990
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* SS1 in bold
1896,98-99
1909,14-15,19
1931-33
1940,1944-46
1953,59
1972-73
1976-78
1987-88,91
1998-99
2009-11?
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4.1 Banking Crises

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First banking crisis 1890-95 involved Bank of New Zealand.
Crisis triggered by a land boom which collapsed in the mid 1880s.
Causes include a decline in wool prices, a sudden stop engineered
by the Bank of England, the Baring crisis of 1890 and the Australian
crisis of 1893.

The BNZ financed and owned much of NZ mortgages.

The BNZ was recapitalized by the government in July 1895.

The cost of the bailout was 1.6% of GDP which was a small fraction
of Australia’s cost.
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Banking Crises

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Second banking crisis 1987 to 1990 also involved the BNZ and a
property boom consequent upon financial deregulation after 1984.
The bust followed the October 1987 Wall Street crash which led to
sharp drops in NZ equities.
The BNZ was recapitalized in 1990 at a cost of 1% of GDP.
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4.2 Currency Crises

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We identify currency crises based on an EMP index supplemented
with historical narrative. New Zealand had 7 currency crises which
occurred during pegged exchange rate regimes.
The crises of 1931 and 1933 occurred as a consequence of the
1937-38 recession. It led to the imposition of a strict exchange
control and import licensing regime.
NZ joined the IMF in 1961. The crisis of 1967 followed the collapse
of the wool market in 1966 which caused deterioration in the
current account and a depletion of New Zealand’s reserves. NZ
devalued by 19.45% following sterling’s devaluation in November.
The 2 oil price shocks of the 1970s led to crises in 1974-74 and
1979. Each led to devaluations.
The last crisis was in 1984 following deregulation of the financial
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sector and the elimination
of Uni
exchange
and capital controls, the NZ
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dollar was devalued by 20%.

4.3 Sudden Stops



We measure sudden stops by a sharp drop in net capital inflow
accompanied by a drop in real GDP (SS1) and (SS2) measured as a
large decline in net capital inflows regardless of the impact on
output.
Sudden stops preceded the 1890s banking crisis, the 1930s crises
and the 1970s crises.
Sudden stops in 1997/98 and 2008/09 did not lead to crises in New
Zealand.
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4.4 Some Evidence for New
Zealand from Pooled Probit
Regressions


Using cross country regression models for the two eras of
globalization Mizhuo Kida of the RBNZ and I ascertain the variables
which made New Zealand more or less vulnerable than the average
countries in the Bordo, Meissner sample to the risks of being hit by
currency crises and sudden stops.
Figure 12 shows the predicted probabilities of having a currency
crisis in New Zealand versus the average country 1880 – 1913.
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4.4 Some Evidence for New
Zealand from Pooled Probit
Regressions


New Zealand performed better in avoiding currency crises by
maintaining a large trade surplus and having positive terms of trade
shocks which offset its relative vulnerabilities from having a
relatively large hard currency mismatch.
Figure 13 shows that in the first era of globalization New Zealand
was slightly more vulnerable to having a sudden stop (SS1) than
average because it had higher original sin and slightly lower gold
reserves on average.
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4.4 Some Evidence for New
Zealand from Pooled Probit
Regressions



For the recent period of globalization 1972 – 1992, when New
Zealand had three currency crises, Figure 14 shows that New
Zealand had a somewhat higher risk of a currency crisis than others
because it had a higher mismatch, higher debt relative to GDP,
higher long term interest rates and lower reserves.
These effects were not fully offset by its high per capita income (as
a proxy for a better set of institutions, more developed financial
system and/or better management of debt).
However, what differentiated New Zealand from other countries
which suffered more frequent currency crisis in the recent period
was its relatively high per capita real income and the characteristics
that goes with it.
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4.4 Some Evidence for New
Zealand from Pooled Probit
Regressions


Thus New Zealand was less exposed to the risks of a currency crisis
than the average in the first era of globalisation because of its
better fundamentals but this was not the case in the second era.
Moreover, in the 1880 – 1913 period New Zealand was vulnerable to
sudden stops because of its high level of original sin.
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4.5 Insulationism

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
In reaction to the Great Depression New Zealand followed a policy
of insulationism to protect the economy from the vagaries of the
global economy. (Singleton 2008, Hawke 1985).
The goals were to maintain full employment, develop manufacturing
and suppress imports while maintaining exports, and remaining on
the sterling peg.
Policies followed included import licensing, high tariffs and financial
controls like interest rate ceilings.
The regime maintained full employment through the 1960s and
fostered an inefficient manufacturing industry.
NZ was hit by the external shocks of the 1970s leading to currency
crises and recession.
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4.5 Insulationism




Increasing evidence of relatively poor growth performance led to
the end of import controls and deregulation of the financial sector
as well as adoption of a floating exchange rate in 1984.
A credible nominal anchor was instituted in 1989, with the RBNZ
getting operational independence and focusing on price stability.
Did the policy of insulationism really achieve the goal of protecting
New Zealand from outside shocks or did it weaken NZ sufficiently to
make it more vulnerable to the bigger shocks that followed in the
1970s?
To answer this question requires a counterfactual exercise to
ascertain whether alternative arrangements such as shifting earlier
to a regime of floating exchange rates, without the extensive
controls, would have done a better job.
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5. Real Shocks and the New
Zealand Economy


Using annual macroeconomic data from 1880 to the present David
Hargreaves of the RBNZ and I investigate the impact of
international variables on the New Zealand real economy.
In a benchmark regression we regressed a three year moving
average growth rate of real NZ per capita income on: the terms of
trade; the real sterling exchange rate; and U.S. real GDP. (See
table 4, column 1).
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5. Real Shocks and the New
Zealand Economy
Table 4 Regression of NZ growth of real per capita GDP on key
drivers of growth
Dependent variable is the 3 year moving average growth in real NZ GDP per capita
Constant
Terms of Trade(-1)
US Per Capita GDP(-1)
Real exchange rate(-3)
Real UK Consol rate(-3)
NZ Capital inflows(-1)
NZ Bank crisis dummy
Residual AR(1) term
Residual AR(2) term
(1)
Coefficient
t-statistic
3.05
2.62
0.17
3.64
0.18
2.32
-0.14
-1.99
0.10
0.51
1.31
-0.59
16.05
-7.35
(2)
Coefficient
t-statistic
3.24
2.75
3.55
0.16
0.16
2.13
-0.15
-2.20
0.15
0.76
6.87
2.03
-1.76
-1.26
1.32
15.86
-0.59
-7.22
2
Adj R
.852
.857
N
109
109
Terms of trade, US GDP and real exchange rate are 3 year moving average growth rates. Capital inflow
is a 2 year change in the 2 year moving average ratio to GDP.
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5. Real Shocks and the New
Zealand Economy Cont..




Real U.S. output, the terms of trade and the real exchange rate are
statistically significant and have reasonable signs.
In column 2 of the table we added indicators of financial crises to
the regression. Both indicators of currency crises and sudden steps
were not statistically significant.
The two long periods of banking crises have a negative impact on
growth although the coefficient is not precisely estimated or
significant. The coefficient is consistent with a four year banking
crisis reducing output by about 2.5 percentage points.
A measure of variability in capital inflows comparable to the SS2
sudden stop indicator is significant. This suggests that slowing or
reversals of capital controls
arePresentation.ppt
deleterious for growth.
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5. Real Shocks and the New
Zealand Economy Cont..

Figure 15 shows the impact of all the regressors in the benchmark
regression (yellow line) compared to the actual variable (blue line).
Figure 15 NZ growth and effects of key driving variables
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5. Real Shocks and the New
Zealand Economy Cont..

U.S. growth and the terms of trade explain much of the variation in
growth with the exception of the second half of the 1920’s and after
the depression. The latter anomaly may partly relate to the
imposition of controls in 1938 and the subsequent shift to wartime
production.
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5. Real Shocks and the New
Zealand Economy Cont..

Figure 16 adds in the crisis variables. The impact of the two
banking crises is evident in the 1890’s and 1990’s.
Figure 16 NZ growth with banking crisis and capital flow effects
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5. Real Shocks and the New
Zealand Economy Cont..

Finally we tested whether there was evidence of instability over time
in the coefficients of global growth and the terms of trade using a
recursive regression and a Kalman filter. See figure 17.
Figure 17 Variation in coefficients on key driving variables
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5. Real Shocks and the New
Zealand Economy Cont..




The variability of external factors was reduced after 1938.
This could reflect both the extensive controls imposed between
1938 and 1984 (shaded in blue) and the use of floating exchange
rates as an economic buffer post 1984.
It is difficult to see much of a difference in the coefficients of the
three variables between the 1938 – 84 period and the subsequent
float.
This could suggest that the costs of the economic distortions in the
controls regime may have been avoided if New Zealand had turned
to a more liberal regime with floating earlier, as for example Canada
did in 1950.
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5.1 The Bottom Line




Financial crises do not appear to have additional strong explanatory
power once the impact of key global variables is accounted for.
This may reflect the mild nature of many of the crises in New
Zealand history.
These results suggests that avoiding banking and currency crises
will not be sufficient to avoid the domestic economic impact of
major disruptions to the global business cycle.
The bottom line is that it is not difficult to find strong evidence that
New Zealand has been crucially influenced by global factors.
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5.1 The Bottom Line cont..


Shocks to the terms of trade, foreign growth, the real exchange rate
and capital inflows all impacted on NZ growth.
Similar factors have been at work in the recent past.
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6. Conclusions and lessons for
Policy




Our historical research suggests that financial crises are often
associated with globalization.
Countries can avoid financial crises by following sound policies and
adopting sound institutions.
Having sound polices and institutions certainly helped the British
dominions, the advanced countries, and some emerging countries,
avoid crises in the first era of globalization.
And our panel probit regression evidence shows, in the first era of
globalization that New Zealand’s predicted probability of having a
currency crisis was somewhat lower than the average country.
Having sound policies and institutions helped avoid crises for some
emergers and small open advanced countries in the current era of
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globalization.
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
6. Conclusions and lessons for
Policy



However, for the recent period New Zealand, despite its higher per
capita income as a proxy for sound institutions, was somewhat
more vulnerable to a currency crisis than the average country.
Moreover, real shocks can have serious real effects on small open
economies like New Zealand which follow basically sound policies
and have solid institutions.
The evidence in this lecture suggests that shocks to U.S. real GDP
as a proxy for global output and shocks to the terms of trade have
material and significant effects on New Zealand’s growth.
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6. Conclusions and lessons for
Policy cont..


The worst example was the Great Depression of the 1930’s but New
Zealand was also hit by the shock of Britain joining the European
common market in 1973, the oil price shocks of the 1970’s, the U.S.
stock market crash of 1987 and the recent U.S. mortgage crisis.
In reaction to global shocks New Zealand shifted to a policy of
insulationism in the late 1930’s.

The subsequent controls regime did succeed in battening down the
hatches for 4 decades and may have provided shelter from foreign
winds.

But at the cost of economic inefficiency and relatively slow growth.
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6. Conclusions and lessons for
Policy cont..


Since 1984 the controls regime has been dismantled and NZ has
shifted to a floating exchange rate and credible fiscal and monetary
policy.
Evidence for Canada since 1950 and many other countries since
1973 suggests that a floating exchange rate is the best insulation
against foreign shocks.

But floating can create problems of its own for a small open
economy.

An alternative for New Zealand could be a monetary union with
Australia but taking such a step would remove the ability to use
domestic monetary policy
toUni
offset
asymmetric shocks.
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6. Conclusions and lessons for
Policy cont..



The jury is still out on EMU as providing more effective insulation
against asymmetric shocks versus what would have been the case if
the individual European countries had their own currencies.
But the benefits of increased integration for a monetary union are
not insignificant.
This is an issue that will continue to be debated for years to come.
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