Abstract:
“Historically, dissolutions of currency unions are not unusual. I use an annual panel data set covering 245 country pairs that use a common currency (of which 128 are dissolved) from 1948 through 1997 to characterize currency union exits. I find that departures from a currency union tend to occur when there is a large inflation differential between member countries, when the currency union involves a country which is closed to international trade and trade flows dry up, and when there is a change in the political status of a member. In general, however, macroeconomic factors have only little predictive power for currency union dissolutions.”
“Large inflation differential between [sic] is consistently associated with a high likelihood of a currency union dissolution” ~(Nitsch)
Disunions “experience a considerable decline in trade prior the break.”
“Countries that leave a currency union tend to have less budgetary discipline.”
“The dissolution of the currency link may be the result of a boom (and bust cycle) in domestic lending.”
“dissolved currency unions tend to involve countries with a particularly large (divergent) domestic credit/GDP ratio”
In looking at the chart above, disunions appear to cluster, with a spate occurring just before the competitive devaluation and stagflationary 1970s.
Further Reading:
- Currency Unions and Breakups
- Pegged Exchange Rate Devaluation Cycle
- Research Shows How a Currency Crises Could Occur in China …
- Anatomy of a Currency Crises with a Fixed Exchange Rate and High …
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