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Joining the European Monetary Union—Comparing First and Second Generation Open Economy Models

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  • Vo Le
  • Patrick Minford

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Abstract

We log-linearise the Dellas and Tavlas (DT) model of monetary union and solve it analytically. We find that the intuition of optimal currency area analysis of DT’s second generation open economy model is essentially the same as that of first generation models. Monetary union results in no welfare loss if its member states are symmetric. However, asymmetry causes loss in welfare both due to the failure of the union policy to deal suitably with a country’s asymmetric shocks and due to an active monetary policy by the union in pursuit of its distinct objectives. The asymmetry in DT is largely due to the differing wage rigidities across countries. Copyright Springer Science + Business Media, LLC 2006

Suggested Citation

  • Vo Le & Patrick Minford, 2006. "Joining the European Monetary Union—Comparing First and Second Generation Open Economy Models," Open Economies Review, Springer, vol. 17(3), pages 281-296, July.
  • Handle: RePEc:kap:openec:v:17:y:2006:i:3:p:281-296
    DOI: 10.1007/s11079-006-9050-0
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    Cited by:

    1. Laurent Molinier & Christel Castelli & Eric Bauvin & Xavier Rebillard & Michel Soulié & Jean-Pierre Daurès & Pascale Grosclaude, 2011. "Cost study of the clinical management of prostate cancer in France: results on the basis of population-based data," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 12(4), pages 363-371, August.
    2. Agénor, Pierre-Richard & Aizenman, Joshua, 2011. "Capital market imperfections and the theory of optimum currency areas," Journal of International Money and Finance, Elsevier, vol. 30(8), pages 1659-1675.
    3. Sánchez, Marcelo, 2008. "Monetary stabilisation in a currency union of small open economies," Working Paper Series 927, European Central Bank.
    4. David Meenagh & Patrick Minford & Eric Nowell & Prakriti Sofat & Naveen Srinivasan, 2007. "Are the facts of UK inflation persistence to be explained by nominal rigidity or changes in monetary regime?," WEF Working Papers 0028, ESRC World Economy and Finance Research Programme, Birkbeck, University of London.
    5. Meenagh, David & Minford, Patrick & Nowell, Eric & Sofat, Prakriti & Srinivasan, Naveen, 2009. "Can the facts of UK inflation persistence be explained by nominal rigidity?," Economic Modelling, Elsevier, vol. 26(5), pages 978-992, September.

    More about this item

    Keywords

    monetary union; representative agent model; multi-country model; wage rigidity; asymmetry;

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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