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Essays on the crisis of monetary union

Hume, Michael (2022) Essays on the crisis of monetary union. PhD thesis, London School of Economics and Political Science.

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This thesis is an inter-disciplinary analysis of the fundamental causes of the decade-long crisis of monetary union and why it has proved so persistent despite major reforms. The consensus narrative of economists has been that the crisis was caused by policy failures and weaknesses in the policy architecture, notably a lack of crisis management and allowing imbalances to get so large. The first two papers reconsider these failures and weaknesses. Paper 1 challenges the consensus view that the fragility of euro-area sovereign bond markets stems from strategic default risk and a failure of policy to coordinate investor beliefs on a ‘good’ equilibrium in the heat of the crisis. Instead, it argues that interaction between the euro area’s legacy bond market structure with a complex policy risk premium created a structural vulnerability that is still to be addressed. Paper 2 finds that imbalances were predominantly caused by credit supply shocks and that, while macroprudential policies may have been helpful in attenuating them, the emergence of imbalances prior to the crisis should not be viewed as a policy failure but as a fact of life in a diverse monetary union. Finally, building on the insights of the previous two papers, Paper 3 formulates a political-financial trilemma founded on the policy goals embodied in the Maastricht compromise. It concludes that euro-area policymakers have been circling around the trilemma over the past decade and that only a multi-faceted approach that anticipates how sovereign bond market structures might change is likely to lead to a stable outcome. The overarching conclusion of the thesis is that the contribution of policy failures and weaknesses in the policy architecture to the crisis has been exaggerated and that greater emphasis should be placed on understanding the structure of sovereign bond markets and their associated vulnerabilities.

Item Type: Thesis (PhD)
Additional Information: © 2022 Michael Hume
Library of Congress subject classification: H Social Sciences > HG Finance
Sets: Departments > European Institute
Supervisor: De Grauwe, Paul and Schelkle, Waltraud

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