Hysteresis can explain eurozone peculiarities – Eichengreen and Bayoumi
Eurozone has not responded to shocks in the way economic theory would normally imply
A form of hysteresis can explain the unusual response of eurozone countries to shocks, according to a working paper published recently by the International Monetary Fund.
Tamim Bayoumi and Barry Eichengreen find that since its creation, the eurozone has responded strangely to positive supply shocks. Normally such a reduction in costs would be seen as lower inflation, but in the case of the eurozone, inflation tended to rise.
The authors suggest this may be due to a form of financial hysteresis
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