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European Monetary Union and Asymmetric Shocks in a New Keynesian Model

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  • Driver, Rebecca L
  • Wren-Lewis, Simon

Abstract

This paper attempts to quantify the costs imposed by asymmetric shocks under European Monetary Union compared to free floating. A simple two-country model is examined where policy is set in an optimal, time consistent manner. Nominal and real rigidities are present in both economies, but prices are set in a forward looking manner and expectations are rational. Results suggest that the costs of asymmetric shocks under EMU may be significantly higher than under free floating, particularly if fiscal policy is not used for demand management. Copyright 1999 by Royal Economic Society.

Suggested Citation

  • Driver, Rebecca L & Wren-Lewis, Simon, 1999. "European Monetary Union and Asymmetric Shocks in a New Keynesian Model," Oxford Economic Papers, Oxford University Press, vol. 51(4), pages 665-688, October.
    • Handle: RePEc:oup:oxecpp:v:51:y:1999:i:4:p:665-88
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    Cited by:

    1. Tatiana Kirsanova & Mathan Satchi & David Vines & Simon Wren-Lewis, 2007. "Optimal Fiscal Policy Rules in a Monetary Union," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(7), pages 1759-1784, October.
    2. Simon Wren-Lewis, 2013. "Macroeconomic Stabilisation in the Eurozone: Lessons from Failure," Global Policy, London School of Economics and Political Science, vol. 4, pages 66-73, July.
    3. Carmen Díaz-Roldán, "undated". "Coordination of Fiscal Policies in a Monetary Union," Working Papers on International Economics and Finance 00-09, FEDEA.
    4. Sotiris Theodoropoulos, 2005. "Asymmetric Shocks, Structural Rigidities and Adjustment Capability in EMU - A Review," European Research Studies Journal, European Research Studies Journal, vol. 0(3-4), pages 3-20.
    5. Óscar Bajo Rubio & Carmen Díaz Roldán, 2000. "On The Insurance Function Of Fiscal Policy In A Monetary Union," Documentos de Trabajo - Lan Gaiak Departamento de Economía - Universidad Pública de Navarra 0012, Departamento de Economía - Universidad Pública de Navarra.

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