In this paper we analyze European business cycles before and under EMU. Across the two periods we ?nd 1) a signi?cant decline in real exchange rate volatility, 2) signi?cant changes in cross-country correlations, and 3) the volatility of macroeconomic fundamentals largely un- changed. We develop...

In the present paper, we develop a two-sector general equilibrium model of a small open economy to explore the transmission mechanisms of external financial shocks. In particular, we use a cash-in- advance model with limited participation augmented with a financial friction in the form of a...