Welfare Implications of Regional Asymmetries in a Monetary Union
This paper calculates welfare costs of nominal rigidities in a currency union (calibrated to the EMU) that is characterized by a rich array of regional asymmetries. I employ a two-country DSGE model that features optimizing agents, monopolistic price setting, sectoral heterogeneity, and government debt dynamics and find that these costs are virtually identical for all members of the union. The driving factor behind this result is economic integration in the Eurozone (in the form of trade openness and highly correlated technological processes), which almost compensates for idiosyncratic regional shocks and causes national and Euro-wide inflations to move together. The findings are robust to the inclusion of distortionary taxes, government indebtedness, and non-traded goods.
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Volume (Year): 11 (2011)
Issue (Month): 1 (December)
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