The effect of openness in a small open monetary union
AbstractIn this paper we build a dynamic stochastic general equilibrium model of a small open monetary union with optimal monetary and fiscal policy, to study the transmission of country specific shocks and associated exchange rate fluctuations. We show that movements of the monetary union’s exchange rate stabilize the output fluctuations inside the monetary union, reducing the need for fiscal stabilization. We also show that, under the optimal policy, fluctuations in the exchange rate and the union-wide aggregates are affected by the differences in the degree of nominal rigidities among the monetary union member countries.
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Bibliographic InfoPaper provided by Bank of Finland in its series Research Discussion Papers with number 18/2010.
Length: 31 pages
Date of creation: 02 Dec 2010
Date of revision:
monetary union; monetary policy; fiscal policy; exchange rate;
Find related papers by JEL classification:
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-01-03 (All new papers)
- NEP-CBA-2011-01-03 (Central Banking)
- NEP-DGE-2011-01-03 (Dynamic General Equilibrium)
- NEP-MAC-2011-01-03 (Macroeconomics)
- NEP-MON-2011-01-03 (Monetary Economics)
- NEP-OPM-2011-01-03 (Open Economy Macroeconomic)
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