Exogenous Asymmetric Supply Shocks in a Nonoptimal Currency Area—How the Eurozone Can(not) Respond to the Energy Crisis

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School of Business | Bachelor's thesis
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Date
2022
Major/Subject
Mcode
Degree programme
Taloustiede
Language
en
Pages
23 + 5
Series
Abstract
The current energy supply cutback of Russian fossil fuels represents an exogenous, asymmetric, negative supply shock for the Eurozone. Since, as per the criteria laid out by the optimum currency area (OCA) theory by Mundell (1961), the Eurozone is a nonoptimal monetary union, its capacity to respond to the shock is stifled. In this literature review, I combine the OCA theory with the macroeconomic AS-AD framework to highlight how the extent of the asymmetry and the nonoptimality of the Euro area restrict monetary and fiscal policy responses and what the potential implications are. Based on my analysis, I argue that the asymmetry and asynchronicity of the shock create a situation where the ECB’s policy rate cannot suit the business cycles of all Eurozone countries simultaneously, EU fiscal rules and existing debt levels hinder flexible country-level fiscal policies, and a lack of fiscal integration prevents the efficient reallocation of resources to the countries that are worst hit by the crisis.
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Thesis advisor
Murto, Pauli
Keywords
optimum currency area, energy crisis, asymmetric supply shocks, monetary policy, fiscal policy
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