How do trade costs affect international trade? This paper offers a new approach. We rely on a flexible gravity equation that predicts variable trade cost elasticities, both across and within country pairs. We apply this framework to the effect of currency unions on international trade. While we...

In the winter 2011/12 a wave of internal capital flight prompted the ECB to abandon its exit strategy and to announce an unprecedented monetary expansion. We analyze this episode in several dimensions: (i) by providing an event-study analysis covering key variables from national central banks'...

I propose a model of the reserve currency paradigm that centers on liquidity demand for safe assets. In global recessions, the demand for U.S. safe assets increases and raises their convenience yields, giving rise to stronger dollar and countercyclical seigniorage revenues. The seigniorage...

This paper quantifies the welfare differences among a monetary union, flexible exchange rates (economic disintegration) and a monetary plus fiscal transfer union (higher economic integration). The vehicle of analysis is a medium-scale New Keynesian DSGE model consisting of two heterogeneous...

This paper argues that the Eurozone crisis stems from a risk management failure in the Eurosystem's design, and that applying insurance theory is useful. We model risk neutral agents choosing portfolios of government bonds of n countries in a monetary union and other assets. We firstly analyse a...

The euro area will not have a centralised budget and smoothing of country-specific asymmetric shocks via private financial markets will develop only slowly. Mistrust among the governments has caused rigid, even pro-cyclical fiscal policies. Smoothing mechanisms are absent due to the fear that...

It is widely debated whether a monetary union has to be accompanied by a fiscal transfer scheme to accommodate asymmetric shocks. We build a model of a monetary union with a central bank and two heterogeneous countries that are linked by a fiscal transfer scheme with repercussions on monetary...

We analyze the similarities and the differences in the fragility of the European Monetary system (EMS) and the Eurozone. We test the hypothesis that in the EMS the fragility arose from the absence of a credible lender of last resort in the foreign exchange markets while in the Eurozone it was...

The paper addresses the question what effects the enlargement of a monetary union will have on necessary structural refoms in the (low distortion) member countries and the (high distortion) candidate country. While monetary union lowers reforms in the candidate country, members of the monetary...

What policy objective should a common central bank in a heterogeneous monetary union pursue? Should it base its decisions on the EU-wide average of inflation and growth or should it instead focus on (appropriately weighted) national rates of inflation and growth? We find that a central bank that...