Asymmetric shocks

Asymmetric shocks

An economic shock is a sudden and often unanticipated change in an economic variable which pushes an economy, region, or economic sector out of its ‘normal’ cycle.

If the shock is symmetrical, it will affect all regions or sectors equally. This is likely to be the case with a general global recession which typically may have a reasonably uniform effect across a region or particular sector.

When shocks are asymmetrical they will not affect all sectors or regions uniformly. Typically, asymmetric shocks affect just one country in a geographical region.

The issue of how asymmetric shocks can be dealt with in a single currency zone, such as the Eurozone, with a single currency and single interest rate is one that has been greatly debated by economists. Much discussion centred on whether or not the Eurozone could be regarded as an ‘optimal’ currency area1 and whether common policies would be capable of achieving macro-economic ojectives across the Eurozone when the economies of member countries were not synchronised. Hence the potential problem of not being able to deal with asymmetric shocks was argued to be one of the greatest obstacles to the success of the Eurozone. Two countries in particular suffered asymmetric shocks – Spain and Finland.

Collapse of the Argentinian peso

The collapse of the Argentinian peso in 2002 affected Spain much more than any other Eurozone  country. This was due to the historical, cultural and, most importantly, business connections between Spain and Argentina. At the time of the peso collapse Spanish firms were some of the largest investors in Argentina.

The Finnish economy

Finland, which was one of the first countries to join the Eurozone in 1999, has been subject to several asymmetric shocks. These incude the decline in demand for its timber and technology products. The rise of Apple and the success of the iPhone had a highly significant affect on Finland because of the contribution of Nokia to the Finnish economy. Other factors also created asymmetries in Finland, inluding the impact of a downturn in the Russian economy – a key feature of its trade was the historical significance of bilateral trade with the Soviet Union.

1R.A.Mundell: A Theory of Optimum Currency Areas, in: American Economic Review, Vol. 51, No. 4, 1961, pp. 657-665.

The chart below indicates that Finland has suffered from a volatile business cycle, and although there is convergence with other EA19 countries, Finand still appears susceptible to asymmetric shocks, and has experienced extended periods of negative growth.