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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...
Persistent link: https://www.econbiz.de/10010500404
Several countries face the choice between targeting inflation independently or entering a monetary union that targets inflation. The present paper extends the theory of optimum currency areas to deal with this choice. In contrast to the conventional theory, countries are shown to form more of an...
Persistent link: https://www.econbiz.de/10012143563
An often heard view is that exchange rate variability will decrease for a country that joins the EMU. This is not necessarily true. Both real and nominal exchange rate variability increase under certain circumstances when asymmetric demand shocks occur inside or outside the union. These results...
Persistent link: https://www.econbiz.de/10010321810
We show in a dynamic stochastic general equilibrium framework that the introduction of a common currency by a group of countries with only partially integrated goods markets, incomplete financial markets and no labor migration across member states, significantly increases volatility of...
Persistent link: https://www.econbiz.de/10010311820
We show in a dynamic stochastic general equilibrium framework that the introduction of a common currency by a group of countries with only partially integrated goods markets, incomplete financial markets and no labor migration across member states, significantly increases volatility of...
Persistent link: https://www.econbiz.de/10010318775
This paper discusses whether the integration of international financial markets affects business cycle fluctuations. In the framework of a new open economy macro-model, we show that the link between financial openness and business cycle volatility depends on the nature of the underlying shock....
Persistent link: https://www.econbiz.de/10010260514
This paper uses a dynamic general equilibrium two-country optimizing sticky-price model to analyze the consequences of international financial market integration for the propagation of asymmetric productivity shocks in a monetary union. The model implies that business cycle volatility is higher...
Persistent link: https://www.econbiz.de/10010260515
We derive the optimal exchange rate policy for a small open economy subject to terms-oftrade shocks. Firm owners and workers are risk averse but workers more so. Wages are given or partially indexed in the short run, and capital markets are imperfect. The government sets the exchange rate to...
Persistent link: https://www.econbiz.de/10010261106
Choosing an exchange-rate regime is largely a matter of choosing the variables that will bear the brunt of adjustment to shocks and disturbances. Floating rates, supported by inflation-targeting regimes of varying degrees of transparency, have dominated currency arrangements in North America,...
Persistent link: https://www.econbiz.de/10010270606
It is conventionally held that countries are worse off by forming a monetary union when it comes to macroeconomic stabilization. However, this conventional view relies on assuming that monetary policy is conducted optimally. Relaxing the assumption of optimal monetary policy not only uncovers...
Persistent link: https://www.econbiz.de/10010326829