Antonio Fatas, citing new work by Andy Rose
(pdf), suggests that currency regimes don’t really matter — in
particular that membership in the euro has not really been a special
problem for peripheral countries.
Challenging preconceptions is always good, and this is a serious debate. I am still, however, very much on the other side. I’d argue two points.
First, nominal wage stickiness — the key argument for the virtues of floating exchange rates — is an overwhelmingly demonstrated fact. Rose doesn’t offer reasons why this doesn’t matter; he just offers a reduced-form relationship between currency regimes and economic performance, and fails to find a significant effect. Is this because there really is no effect, or because his tests lack power?
Second, there is the very striking empirical observation that debt levels matter much less for countries with their own currency than for those without. Here’s one view of the relationship between debt levels and borrowing costs (data from Greenlaw et al):
And here’s another view of the same data, with euro members identified:
It sure looks as if debt matters only for those on the euro, doesn’t it? For what it’s worth, here’s a regression of interest rates on debt that uses a dummy for euro membership, and allows an interaction between that dummy and debt:
Indeed: debt only seems to matter for euro nations.
So I don’t buy the notion that the currency regime is irrelevant. But clearly the Rose results need to be taken seriously, and we have to figure out why he finds what he does.
Challenging preconceptions is always good, and this is a serious debate. I am still, however, very much on the other side. I’d argue two points.
First, nominal wage stickiness — the key argument for the virtues of floating exchange rates — is an overwhelmingly demonstrated fact. Rose doesn’t offer reasons why this doesn’t matter; he just offers a reduced-form relationship between currency regimes and economic performance, and fails to find a significant effect. Is this because there really is no effect, or because his tests lack power?
Second, there is the very striking empirical observation that debt levels matter much less for countries with their own currency than for those without. Here’s one view of the relationship between debt levels and borrowing costs (data from Greenlaw et al):
It sure looks as if debt matters only for those on the euro, doesn’t it? For what it’s worth, here’s a regression of interest rates on debt that uses a dummy for euro membership, and allows an interaction between that dummy and debt:
So I don’t buy the notion that the currency regime is irrelevant. But clearly the Rose results need to be taken seriously, and we have to figure out why he finds what he does.
The New York Times
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