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Financial Differences and Business Cycle Co-Movements in a Currency Area

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  • ESTER FAIA

Abstract

I propose a unitary framework to interpret the links between differences in financial structures and the monetary policy regimes, on the one hand, and the correlation of business cycles, on the other. Using a two-country micro-founded model with financial frictions I predict that a greater financial diversity should reduce cyclical correlation under a given monetary regime and that moving from independent monetary policies to a hard peg or a common currency should increase it, for any given degree of financial diversity. I use the recent experience of EMU to test these ideas and show that my model explains reasonably well the broad patterns of business cycle correlation observed recently among the main euro area countries. Copyright 2007 The Ohio State University.

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Bibliographic Info

Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 39 (2007)
Issue (Month): 1 (02)
Pages: 151-185

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Handle: RePEc:mcb:jmoncb:v:39:y:2007:i:1:p:151-185

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Cited by:
  1. Giovanni Lombardo & Luca Dedola, 2010. "Financial Frictions, Financial Integration and the International Propagation of Shocks," 2010 Meeting Papers 288, Society for Economic Dynamics.
  2. Zeno Enders & Philip Jung & Gernot J. Müller, 2009. "Has the Euro changed the Business Cycle?," Bonn Econ Discussion Papers bgse6_2009, University of Bonn, Germany.
  3. Santos Silva, J.M.C & Tenreyro, Silvana, 2010. "Currency Unions in Prospect and Retrospect," CEPR Discussion Papers 7824, C.E.P.R. Discussion Papers.
  4. Natalia T. Tamirisa & Alain N. Kabundi & Deniz Igan & Francisco Nadal-De Simone & Marcelo Pinheiro, 2009. "Three Cycles," IMF Working Papers 09/231, International Monetary Fund.
  5. PIROVANO, Mara, 2013. "International financial integration, credit frictions and exchange rate regimes," Working Papers 2013015, University of Antwerp, Faculty of Applied Economics.
  6. repec:onb:oenbwp:y::i:162:b:1 is not listed on IDEAS

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