An interesting note

More on why the euro is not an optimal currency area.

We\’ve a housing bubble inflating in Vienna which rather needs to be popped with a dose of higher interest rates.

Hands up all those who think Ireland needs higher rates right now?

Quite.

5 thoughts on “An interesting note”

  1. what would the same graph for London and Hull show? Or Detroit and Atlanta? So yes, interesting, but no, doesn’t prove the point. There are ways to cool a housing bubble other than raising interest rates, as the Irish should have known.

  2. Quite right, Ambrose. Another Easter Rising would probably have done the trick. Or they could have shelled the Post Office.

  3. “We’ve a housing bubble inflating in Vienna which rather needs to be popped with a dose of higher interest rates.”

    That can be done by Viennese banks without ECB involvement. But what incentive is there for them to do it?

    That can be done by Viennese authorities through taxation or planning matters without ECB involvement. But what incentive is there for them to do it?

    Central bank interest rates are such a general view that responsibility for local bubbles returns to local organs like councils and banks. Instead banks in particular seem to have been confident that each, any and every housing bubble no matter how localised would be dealt with by the central bank raising interest rates, which didn’t happen. This then probably was reduced to No sign of movement from central bank = carry on as you are.

  4. I have to disagree with the central contention about the supposed ills of the ‘one size fits all’ Euro.

    Money has been used by the authorities as a blunt policy tool, to disasterous effect over many years, yet the private sector, miraculously, adapts to the carnage, and soldiers on. The idea that authorities should now ‘slap the face’ one part of the private sector, how ever much we are worried, is unfortunate.

    The problems of eurpoe do not come down to which fiduciary media we choose (or are allowed) to use as a means of exchange. The actual problem is twofold;

    1) Is money sound, thus allowing rational choices by economic actors, based upon a stable amount of money relative to goods and services (or even, just a stable amount of money, full stop). Is the rate of interest charged represnetative of the time preference choices of those economic actors?

    2) How much are the authorities interfering in the natural flows of capital allocation.

    I would suggest that these two factors are of immense importance, and lie at the heart of Vienna’s, Ireland’s, Eurpoe’s and indeed the world’s troubles.

  5. How big is an optimal currency area?
    No, me neither.
    As trade widens, the optimal area might get bigger.
    As forex markets get more liquid, quicker, etc. then the optimal area gets smaller.
    My guess is that the effect of the latter outweighs the advantages of the former.
    But it’s only a guess.

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