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

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Author Info
Ester Faia () (Department of Economics and Business, Universitat Pompeu Fabra)

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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.

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Paper provided by Oesterreichische Nationalbank (Austrian Central Bank) in its series Working Papers with number 97.

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Length: 50 pages
Date of creation: 12 May 2005
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Handle: RePEc:onb:oenbwp:97

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Related research
Keywords: financial diversity; monetary regimes; differential transmission mechanism;

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Find related papers by JEL classification:
E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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