The EMU accession countries are obliged to fulfill the Maastricht convergence criteria prior to entering the EMU. What should be the optimal monetary policy satisfying these criteria? To answer this question, the paper proposes a DSGE model of a two-sector small open economy. First, I derive the...

This paper proposes a channel through which increased openness to international trade can increase a country’s long-run incentive to create inflation. The theoretical justification for this channel is the well known “beggar thy neighbor” incentive, and its dominance relies on a monetary...

The EMU accession countries are obliged to fulfill the Maastricht convergence criteria prior to entering the EMU. What should be the optimal monetary policy satisfying these criteria? To answer this question, the paper proposes a DSGE model of a two-sector small open economy. First, I derive the...

A two area dynamic stochastic general equilibrium model is employed to investigate the welfare implications of losing monetary independence. Two policy regimes are compared: (i) in one area there is a common currency, while in the other area countries still retain their autonomous monetary...

This paper revisits the question of the appropriate domain of a currency area using a New-Keynesian open economy model in which the world is split in two areas, each framed as a continuum of small open regions. We show that the adoption of a common currency like the euro can be beneficial for...

This paper investigates the importance of fiscal policy in providing macroeconomic stabilisation in a monetary union. We use a microfounded New Keynesian model of a monetary union which incorporates persistence in inflation and non-Ricardian consumers, and derive optimal simple rules for fiscal...

We introduce "financial imperfections" -- asymmetric net wealth positions, incomplete risk-sharing, and interest rate spreads across member countries -- in a prototypical two-country currency union model and study implications for monetary policy transmission mechanism and optimal policy. In...

There are potential gains for most countries joining the planned EMU. It is argued that these gains are not primarily due to the creation of a currency area but, they depend on the high degree of political independence a European central bank can obtain. The transition path to the EMU with its...

This paper develops a two-country DSGE model for a monetary union in which each country is populated by two types of households - savers and borrowers - and two types of production sectors - a consumption goods sector and a housing sector. Households trade nominal private debt in equilibrium,...

There is growing empirical evidence that the strength of the cost channel of monetary policy differs across countries. Using a New Keynesian model of a two-country monetary union, we show how the introduction of a cost channel (differential) alters the optimal monetary responses to union-wide...