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Stabilization of supply shocks in a structurally heterogeneous monetary union✰

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  • MENGUY, Séverine

Abstract

The paper provides accurate theoretical results regarding the consequences of heterogeneities between the preferences or between the structural parameters of the member countries of a monetary union on monetary and fiscal policies, and on the stabilization of economic activity and inflation, in case of supply shocks. Economic activity and inflation are higher (smaller) in a country affected by a positive (negative) symmetric or asymmetric supply shock, despite the more contractionary (expansionary) fiscal policy in this country. In this context, we find that monetary unification could be more painful for a country with a small preference for stabilizing the budget deficit or economic activity, and on the contrary with a high preference for stabilizing inflation. Besides, regarding structural heterogeneities, monetary unification could be more painful for a country with strong transmission mechanisms of monetary policy or with a small budget multiplier. Membership in a monetary union could also be more painful for a country with a high (if the shock is symmetric) or small (if the shock is asymmetric) sensitivity of national prices to foreign prices. Regarding symmetric supply shocks, it could also be more painful for a country with a high sensitivity of national prices to national economic activity, or with a small sensitivity of its demand to foreign activity.

Suggested Citation

  • MENGUY, Séverine, 2023. "Stabilization of supply shocks in a structurally heterogeneous monetary union✰," Research in Economics, Elsevier, vol. 77(3), pages 362-389.
    • Handle: RePEc:eee:reecon:v:77:y:2023:i:3:p:362-389
    DOI: 10.1016/j.rie.2023.06.005
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    More about this item

    Keywords

    Monetary union; Asymmetric supply shock; Symmetric supply shock; Economic stabilization;
    All these keywords.

    JEL classification:

    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions

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