Hysteresis can explain eurozone peculiarities – Eichengreen and Bayoumi

Eurozone has not responded to shocks in the way economic theory would normally imply

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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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