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Which policy-mix to mitigate the effects of financial heterogeneity in a monetary union?

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  • Christina Badarau

    ()
    (Larefi, Université Bordeaux IV)

  • Grégory Levieuge

    (LEO,Université d'Orléans)

Abstract

This paper aims to study a suitable policy-mix for a monetary union like the euro area, in a context of financial heterogeneity. It relies on a DSGE model with empirically-justified heterogeneous bank capital channel, with financial shocks, in addition to monetary, budgetary and technological ones. The analysis leads to the following conclusions. A centralized monetary policy appears to be more advantageous for the union than an alternative inflation-divergences oriented policy. Besides, national budgetary policies can mitigate cyclical divergences. Nevertheless, the exam of various policy-mixes indicates that the superiority of a cooperative budgetary regime only relies on the fact that it allows a better stabilization of public spending divergences in the Union. On the other hand, national variables are less stabilized under this regime. These results are finally discussed in light of the subprime mortgage crisis context.

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Bibliographic Info

Paper provided by Larefi, Université Bordeaux 4 in its series Larefi Working Papers with number 1109.

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Length: 32 pages
Date of creation: Feb 2011
Date of revision:
Handle: RePEc:laf:wpaper:cr1109

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Keywords: euro area; financial heterogeneity; monetary/budgetary policy rules; DSGE model.;

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  1. Sevestre, Patrick & Martinez-Pages, Jorge & Gambacorta, Leonardo & Ehrmann, Michael & Worms, Andreas, 2001. "Financial systems and the role of banks in monetary policy transmission in the euro area," Discussion Paper Series 1: Economic Studies 2001,18, Deutsche Bundesbank, Research Centre.
  2. Angeloni Ignazio & Ehrmann Michael, 2007. "Euro Area Inflation Differentials," The B.E. Journal of Macroeconomics, De Gruyter, vol. 7(1), pages 1-36, August.
  3. Fagan, Gabriel & Henry, Jérôme & Mestre, Ricardo, 2001. "An area-wide model (AWM) for the euro area," Working Paper Series 0042, European Central Bank.
  4. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  5. Cristina Badarau-Semenescu, & Gregory Levieuge, 2010. "Assessing the Potential Strength of a Bank Capital Channel in Europe: A Principal Component Analysis," The Review of Finance and Banking, Academia de Studii Economice din Bucuresti, Romania / Facultatea de Finante, Asigurari, Banci si Burse de Valori / Catedra de Finante, vol. 2(1), pages 005-016, June.
  6. Faia, Ester, 2002. "Monetary policy in a world with different financial systems," Working Paper Series 0183, European Central Bank.
  7. Julien Licheron, 2009. "Politique monétaire de la bce et inertie des taux d'intérêt. Quel rôle pour les indicateurs d'inflation nationaux ?," Revue économique, Presses de Sciences-Po, vol. 60(3), pages 713-725.
  8. Fourcans, Andre & Vranceanu, Radu, 2007. "The ECB monetary policy: Choices and challenges," Journal of Policy Modeling, Elsevier, vol. 29(2), pages 181-194.
  9. Alves, Nuno, 2008. "The mechanics of a monetary union with segmented financial markets," Journal of Macroeconomics, Elsevier, vol. 30(1), pages 346-368, March.
  10. Angeloni, Ignazio & Ehrmann, Michael, 2003. "Monetary policy transmission in the euro area: any changes after EMU?," Working Paper Series 0240, European Central Bank.
  11. Chen, Nan-Kuang, 2001. "Bank net worth, asset prices and economic activity," Journal of Monetary Economics, Elsevier, vol. 48(2), pages 415-436, October.
  12. Andersen, Torben M., 2005. "Fiscal stabilization policy in a monetary union with inflation targeting," Journal of Macroeconomics, Elsevier, vol. 27(1), pages 1-29, March.
  13. Jean-Bernard Chatelain & Andrea Generale & Philip Vermeulen & Michael Ehrmann & Jorge Martínez-Pagés & Andreas Worms, 2003. "Monetary policy transmission in the euro area: New evidence from micro data on firms and banks," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00119489, HAL.
  14. Jean-Bernard Chatelain & Michael Ehrmann & Andrea Generale & Jorge Martínez-Pagés & Philip Vermeulen & Andreas Worms, 2003. "Monetary Policy Transmission in the Euro Area: New Evidence From Micro Data on Firms and Banks," Journal of the European Economic Association, MIT Press, vol. 1(2-3), pages 731-742, 04/05.
  15. Blum, Jurg & Hellwig, Martin, 1995. "The macroeconomic implications of capital adequacy requirements for banks," European Economic Review, Elsevier, vol. 39(3-4), pages 739-749, April.
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