How Asymmetric Shocks Create Disequilibria in a Monetary Union - Assignment Example

Economics of EU How asymmetric shocks create disequilibria in a monetary union The enlarged European Union is a heterogeneous areashowing various economic features. Among other different economic characteristics, the income per capita and productive frameworks still differ greatly across membership countries. However, the union looks set to attain some degree of convergence set out at the start. The heterogeneity is a major cause of asymmetric shocks. They are shocks that have different impacts on various regions across member countries. It is essential that the union put in place various adjustment mechanisms to counter negative influences brought by asymmetric shocks. Among the measures is labour mobility to cushion the influence of asymmetric shocks in various regions. The nature of shocks affecting the European Monetary Union is essential because the impact on output as well as prices remain different essentially. Furthermore, the importance depends on whether the shocks affect a specific country or are common across the union. One-way through which asymmetric shocks create disequilibria in a monetary union is through costs. A cost is the loss of economic stability from attempts to put in place adequate measures to fix exchange rates. It also occurs when member countries of European Monetary Union (EMU) adapts to a common currency. It is possible to generate the costs in specific situations using many sources of benefits. Distinguished costs from diminishing stability of macroeconomic factors exist and costs incurred from the deterioration of efficiency in micro factors as well as those resulting from negative external features. Scholars relate deterioration of the stability of macro factors to decreasing possibility faced by a country joining EMU in the form of monetary policy. It takes place in the process of implementing real adjustments while confronting asymmetric shocks. More so, adoption of a common currency means the member country surrenders the authority of setting exchange rates and monetary policy to the ECB, a supranational central bank. On other occasions, fiscal restraints become inefficient as much as, they appear to exert fiscal control. The EMU case is the Stability and Growth Pact as well as the Excessive Deficit Procedure. Experts point out that affected countries should keep off a procyclical fiscal plan of action when the economy booms (An & Schorfheide 166). However, member countries in disequilibria lack the capacity to implement standards required in having automatic stabilizers necessary for symmetrical operations in the whole cycle. The second proposal from economists is factoring public investments like any other form of expenditure. On the country, the proposal becomes in consequential in the face of prevailing circumstances. Affected countries require high levels of investment in the public sector. Once a country gives away sovereignty of monetary policy, it gives up the ability to reduce the debt. It is a plan of action offering a solution to other financial problems under special circumstances. Other costs relate to switching to the newly launched currency (the Euro) with new forms including legal, administrative, hardware, and psychological. Hardware costs include costs of adapting new vending machines as well as re-denominating agreements. Competitiveness of a country depends on its choice of nominal exchange parity. Asymmetric shocks influence the existence of an imbalance of external account. The solution to the problem comes from restructuring prices and wages aimed at taking care of the situation. Ways through which labour market mobility cushion the impact of asymmetric shocks inside a currency area A country or a region affected by asymmetric shocks must strive to achieve certain properties to reduce the cost resulting from surrendering control of national monetary policy. First, the country or region must work towards having a high degree of labour mobility. Employees losing jobs in a country or a region hit by negative effects of asymmetry ought to move to a country or a region within the union not affected in the same way. Asymmetric shocks minimize output as they push up unemployment (Botman 19). Mobility of labour to a region or a country not reeling from the influence of idiosyncratic shocks offers a mechanical adjustment mechanism. If France reels from unemployment, those who lose jobs can cross to Germany to take up jobs without a change in wages. Labour mobility in the EU over the period ((An & Schorfheide 167) The Optimal Currency Theory (OCA) provides a framework that studies the stability wages (price) within the context of adjustment to asymmetric shocks including shocks affecting the growth of employment and shifts in the demand for labour. The flexibility of relative prices helps in translating positive shocks in demand for labour into an increase of levels of price. A consensus is that labour mobility is an adjustment mechanism with the capacity to cushion a region or a country against negative influences of asymmetric shocks. Asymmetric shocks still exist because of enhanced integration within the European Monetary Union (EMU). The mobility of labour across the European Union is however, still low. Scholars reach this conclusion after making comparison with the level of mobility in the United States. The other problem in the EMU is that all other mechanisms do not still function properly. Effects of a preferential trade agreement (PTA) In many ways, preferential trade agreements appear as negative externality presented by signatories to the agreement on non-members. A simple model can illustrate fundamental economic effects of Preferential Trade Agreements (PTA). Preferential Trade Agreements have two impacts on the export side of a trading sphere. First, exporters in associate countries benefit from improved access to markets. The removal of taxes results into the benefit. More so, executing tariff discrimination helps exporters to enjoy recued imports that would increase competition (Bergin 33). Economists also refer to the second advantage as preference rent. The etymology of the name is that the benefit would not exist in the presence of liberalizing tariffs in a way that eliminates discrimination. Two ambiguous impacts arise to the import side from preferential trade agreements. Considering the market for a specific good X with the home country being an importer, the impact on partner for another good Z becomes analogous (Benigno c112). In this case, the existence of a preferential trade agreement offsets price effects and volume. Increase in imports benefits the home economy by supplying efficient imports to replace expensive goods produced locally. Gaining and losing from preferential Trade Agreements depends on initial tariffs existing before the agreements and elasticities of supply and demand. The other rationale for preferential trade agreements is neutralizing beggar-thy-neighbour policy. A trade policy can constitute an effect of beggar-thy-neighbour. Trade measures leaning towards the protectionist theory have unilateral attractions but carry destructions that remain multilateral in nature. Through global externality effects, trade policies of one player in international trade influence the welfare of another player in the same market negatively resulting in the beggar-thy-neighbour effect. Other scholars refer to it as a cross-border effect. A review of literature on trade policy reveals two effects of the same. Circumstances under which trade liberalisation is by all means welfare enhancing Economists agree on the fact that free trade remains one of the best forms of business exchange. Free trade across the globe is good for global welfare. The greatest strength falls in the bargaining power of suppliers. Many suppliers compete for the business by the retailer. Materials are available and include cotton and rubber. Through this, Lululemon gets the room to choose from a wide variety (Brooks 449). This way, the bargaining power for suppliers becomes low. From the perspective of the bargaining power of buyers, clients belonging to the company have a high bargaining power but, as a group. The threat posed by new entrants in the market for the components remains moderate comparatively. This generates adequate economies of scale for Lululemon. Low front costs for companies emanate from the fact that companies have the ability to outsource their manufacturing in fact, from overseas. The sports apparel industry remains one of the most competitive around the world and companies continue to take positions that give them a competitive advantage in the market. However, it becomes advantageous for Lululemon because the industry lacks many substitutes to its goods. Cross-country data on indicators of employment protection and long-term unemployment rates i) Features common to countries include clear definition of resources, application of well-defined rules that highlight the rights, elaborate on the sanctions for failures, and explanation of responsibilities. The characteristics focus on systematic monitoring mechanisms, calibrated sanctions against various offence levels, systems of resolving conflicts that remain affordable to institutions, limited appreciation of the rights to arrange for events, as well as methodologies for adaptive management that includes among others rules of modification. These factors have important roles they play in developing the level and degree of trust build through cooperation. Particular challenges exist within the dominion of natural resources associated with renewable resources containing qualities of open access. The continued degradation of accessing fisheries serves as a good example of this feature. Environmental quality issues also influence important commons problems. The process of developing market-based methodologies in instilling measures to protect the environment constitutes an essential economic contribution towards addressing problems of commons. The graph shows the trends in employment rates in France (Benigno c112) The role played by the efforts in solving commons problems in the current century that includes global climate change is immense. In addressing common problems using common-economic requires three forms of resources. The private measures contains incentives of ownership ensures that people invest in long-term returns on their property. In this context, the role of the state entails protection and regulation of economic rights. ii) The feature surrounds collective choice rules. These are locally developed regulations that manage distribution of responsibilities and rights. Institutions that aspire to manage resources adequately require resources and user countries to constitute manageable sizes with clear boundaries. Comparatively, benefits that Switzerland anticipates must be greater than the cost or at least be equal. Finally, one of the most important aspects of successful institutions is having conflict resolutions methodologies that remain easy to adapt and apply. Addressing problems using common economic requires application of an accepted economic framework that demands personalization of control measures over resources. Through this, the individualized economic becomes the most appropriate option. However, in using this economic model, division and control of resources among individuals develops limitations in using the same recommended model. This requires measures that enclose and privatize the commons. Such action appears a parable in other quotas because it influences academic inquiries as well as policy formulation debates within the field of natural resource management. The graph shows patterns across the UK(Benigno c113) The number of limits within the atomization framework increases the number of individuals and this, increases costs of transaction that contributes to the group of externalities. The effect of production re-location and impact of terms of trade are the two influences. Preferential trade agreements neutralize cross-border effects that are negative thereby ensuring that policies of player in the global do not suffocate a different player. The traditional approach of the primary logic of trade stipulates that players with immense power in the market should not fail to cooperate. Switzerland is a player in international tradeand sets policies that derive benefits for the setting country. On the contrary, the process leads to an inefficient equilibrium for non-cooperation. The non-cooperative equilibrium cancels out trade policies set by the players (Burstein 1211). Preferential Trade Agreements enhance the process of gaining credibility. The agreements are essential tools in stopping the government from creating beggar-thyself strategies. Trade agreements tie the hands of a government forcing it commit itself to better terms of trade. It prevents reversals in future for short-term gains by the government. Any government understands clearly that trade agreements help them in setting credible commitments of practical policies. In certain situations, the government commits to a preferential trade agreement to address a type of problem faced with time-inconsistency. Other instances of credibility complications occur when a particular government faces pressures from the political front courtesy of interested groups and civil organizations. Producers competing in the import market benefit a lot from import tariffs. Furthermore, restrictions on imports re-direct investments from other activities of the economy. iii) Preferential Trade Agreements are responsible for creating increased market size for goods and services. They allow companies from signatory states to take advantage of economies of scale provided by the expanded market. Such companies enjoy relative advantages compared to firms from countries excluded from the trade agreement. Being a signatory to a trade agreement increases the position and image of a country as the safest hub for direct foreign investment (FDI) (Canova 116). The latter reasons become more applicable to countries running small economies. Such reasons explain the insistence on environmental standards as well as intellectual property rights that remain particularly controversial when assenting to concessions with nations operating large economies. The increase in markets after formation of trade agreements (Burstein 1212) Under the public tenure form of resource allocation, the government undertakes sustainable measures to safeguard natural resources using clear allocation procedures as well as adequate enforcement of guidelines and appropriate use of rights. Communal allocation tenure has various features. It is important for Scotland to be effective and sufficient. This facilitates proper management of natural resources because they have flexible capacities. Important features are calibrated sanctions that are enforceable punishment techniques applying to failing group choice rules besides desired degree of offence. Bibliography An, S., Schorfheide, F., 2007, Bayesian Analysis of DSGE Models, Econometric Reviews 26(2-4): 113-172. Benigno, G., 2003, Equilibrium Exchange Rates and Supply-Side Performance, Economic Journal 113(486): C103-C124. Bergin, P., 2003, Putting the `New Open Economy Macroeconomics to a test, Journal of International Economics 60: 3-34. Botman, D., 2006, A New-Open-Economy-Macro Model for Fiscal Policy Evaluation, IMF Working Paper 06/045. Brooks, S.P., 1998, General Methods for Monitoring Convergence of Iterative Simulations, Journal of Computational and Graphical Statistics 7(4): 434-455. Burstein, A.T., 2003, Distribution costs and real exchange rate dynamics during exchange-rate-based stabilizations, Journal of Monetary Economics 50: 1189-1214. Canova, F., 2007, Methods for Applied Macroeconomic Research, Princeton University Press. Read More