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Fragmented Monetary Unions

Author

Listed:
  • Luca Fornaro
  • Christoph Grosse-Steffen

Abstract

We provide a theory of financial fragmentation in monetary unions. Our key insight is that currency unions may experience of symmetry: that is episodes in which identical countries react differently when exposed to the same shock. During these events part of the union suffers a capital flight, while the rest acts as a safe haven and receives inflows. The central bank then faces a difficult trade-off between containing unemploymnet in capital-flight countries, and inflationary pressures in safe-haven ones. By counteracting private capital flows with public ones, unconventional monetary interventions mitigate the impact of financial fragmentation on employment and inflation, thus helping the central bank to fulfill its price stability mandate.

Suggested Citation

  • Luca Fornaro & Christoph Grosse-Steffen, 2024. "Fragmented Monetary Unions," Working Papers 1437, Barcelona School of Economics.
    • Handle: RePEc:bge:wpaper:1437
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    More about this item

    Keywords

    Monetary unions; euro area; fragmentation; optimal monetary policy in openeconomies; Capital flows; fiscal crises; unconventional monetary policies; inflation; endogenous breaking of symmetry; Optimum;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions

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