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Markets Integration and Macroeconomic Dispersion in a Monetary Union

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  • Aurélien Eyquem

    (GATE, UMR CNRS 5824, Université de Lyon and Econole Normale Supérieure de Lyon)

  • Jean-Christophe Poutineau

    (CREM, UMR CNRS 6211, Université de Rennes 1 and Ecole Normale Supérieure de Cachan)

Abstract

Using a two country DGSE combining nominal rigidities and financial frictions, we show that the persistence of output and inflation asymmetries observed since 1999 in an increasingly integrated EMU is not necessarily puzzling. Only the integration of final goods markets unambiguously leads to a reduction of asymmetries while the integration of final goods markets and the integration of financial markets increase the dispersion of inflation rates and business cycles. The result builds on the intensive use of financial markets, i.e. the current account, to adjust externally and smooth the consequences of asymmetric shocks. This mechanism implies a disconnection of country-level outputs and /or inflation rates to ensure that agents return to their initial asset position in the long run.

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Bibliographic Info

Paper provided by Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) in its series Discussion Papers (REL - Recherches Economiques de Louvain) with number 2010011.

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Length: 25
Date of creation: 01 Mar 2010
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Handle: RePEc:ctl:louvre:2010011

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Keywords: Monetary union; Markets integration; Trade openness; inflation dispersion; output dispersion;

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  1. Dellas, Harris & Tavlas, George, 2003. "Wage Rigidity and Monetary Union," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3679, C.E.P.R. Discussion Papers.
  2. Pierpaolo Benigno & Michael Woodford, 2004. "Inflation stabilization and welfare: The case of a distorted steady state," Discussion Papers, Columbia University, Department of Economics 0405-04, Columbia University, Department of Economics.
  3. Maximo Camacho & Gabriel Perez-Quiros, 2004. "Are European business cycles close enough to be just one?," Computing in Economics and Finance 2004, Society for Computational Economics 16, Society for Computational Economics.
  4. Benigno, Pierpaolo, 2001. "Optimal Monetary Policy in a Currency Area," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2755, C.E.P.R. Discussion Papers.
  5. Paul de Grauwe & Francesco Paolo Mongelli, 2005. "Endogeneities of Optimum Currency Areas: What brings Countries Sharing a Single Currency Closer together?," Working Papers de Economia (Economics Working Papers), Departamento de Economia, Gestão e Engenharia Industrial, Universidade de Aveiro 29, Departamento de Economia, Gestão e Engenharia Industrial, Universidade de Aveiro.
  6. Jean-Olivier Hairault, 2002. "Labor-Market Search and International Business Cycles," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 5(3), pages 535-558, July.
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