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The mechanics of a monetary union with segmented financial markets

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  • Alves, Nuno
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    Abstract

    In this paper we characterize the transmission mechanism in a monetary union with segmented financial markets. We conclude that the impact of a monetary policy shock on the aggregate variables of the union depends on the degree of financial market segmentation. We also find that a monetary injection yields heterogeneous allocations across countries. In particular, a temporary monetary policy shock leads to permanent trade balance and current account effects. Further, the consumption correlation between countries is smaller than the output correlation. The degree of financial market segmentation and the endogenous distribution of liquidity in the monetary union are key to understanding this equilibrium.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Macroeconomics.

    Volume (Year): 30 (2008)
    Issue (Month): 1 (March)
    Pages: 346-368

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    Handle: RePEc:eee:jmacro:v:30:y:2008:i:1:p:346-368

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    Web page: http://www.elsevier.com/locate/inca/622617

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    1. Stephen G. Cecchetti, 1999. "Legal Structure, Financial Structure, and the Monetary Policy Transmission Mechanism," NBER Working Papers 7151, National Bureau of Economic Research, Inc.
    2. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1998. "Modeling Money," NBER Working Papers 6371, National Bureau of Economic Research, Inc.
    3. Baxter, M. & Crucini, M., 1991. "Business Cycles and the Asset Structure of Foreign Trade," RCER Working Papers 316, University of Rochester - Center for Economic Research (RCER).
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    5. Lucas, Robert Jr., 1990. "Liquidity and interest rates," Journal of Economic Theory, Elsevier, vol. 50(2), pages 237-264, April.
    6. Don E. Schlagenhauf & Jeffrey M. Wrase, 1992. "Liquidity and real activity in a simple open economy model," Discussion Paper / Institute for Empirical Macroeconomics 57, Federal Reserve Bank of Minneapolis.
    7. Smets, Frank & Wouters, Rafael, 2004. "Comparing Shocks and Frictions in US and Euro Area Business Cycles: A Bayesian DSGE Approach," CEPR Discussion Papers 4750, C.E.P.R. Discussion Papers.
    8. Domeij, David & Floden, Martin, 2001. "The labor-supply elasticity and borrowing constraints: Why estimates are biased," Working Paper Series in Economics and Finance 480, Stockholm School of Economics.
    9. Nuno Alves & José Brandão de Brito & Sandra Gomes & João Sousa, 2006. "The Transmission of Monetary and Technology Shocks in the Euro Area," Working Papers w200602, Banco de Portugal, Economics and Research Department.
    10. Benigno, Pierpaolo, 2004. "Optimal monetary policy in a currency area," Journal of International Economics, Elsevier, vol. 63(2), pages 293-320, July.
    11. Bernardino Adão & Isabel Horta Correia & Pedro Teles, 2003. "The Monetary Transmission Mechanism: Is it Relevant for Policy?," Working Papers w200313, Banco de Portugal, Economics and Research Department.
    12. Lawrence J. Christiano, 1991. "Modeling the liquidity effect of a money shock," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 3-34.
    13. Giovannetti, Giorgia & Marimon, Ramon, 1998. "An EMU with Different Transmission Mechanisms," CEPR Discussion Papers 2016, C.E.P.R. Discussion Papers.
    14. Putkuri , Hanna, 2003. "Cross-country asymmetries in euro area monetary transmission: the role of national financial systems," Research Discussion Papers 15/2003, Bank of Finland.
    15. Cooley, Thomas F & Quadrini, Vincenzo, 2001. "The Cost of Losing Monetary Independence: The Case of Mexico," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(2), pages 370-97, May.
    16. Cooley, Thomas F. & Quadrini, Vincenzo, 1999. "A neoclassical model of the Phillips curve relation," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 165-193, October.
    17. Fuerst, Timothy S., 1992. "Liquidity, loanable funds, and real activity," Journal of Monetary Economics, Elsevier, vol. 29(1), pages 3-24, February.
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    Cited by:
    1. repec:laf:wpaper:201109 is not listed on IDEAS
    2. Agenor, Pierre-Richard & Aizenman, Joshua, 2008. "Capital Market Imperfections and the Theory of Optimum Currency Areas," Santa Cruz Department of Economics, Working Paper Series qt7668j94x, Department of Economics, UC Santa Cruz.
    3. Christina Badarau & Grégory Levieuge, 2011. "Which policy-mix to mitigate the effects of financial heterogeneity in a monetary union?," Larefi Working Papers 1109, Larefi, Université Bordeaux 4.

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