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Asymmetric Shocks in a Currency Union with Monetary and Fiscal Handcuffs

In: NBER International Seminar on Macroeconomics 2010

  • Christopher J. Erceg
  • Jesper Lindé

This paper investigates the impact of the asymmetric shocks within a currency union in a framework that takes account of the zero bound constraint on policy rates, and also allows for constraints on fiscal policy. In this environment, we document that the usual optimal currency argument showing that the effects of shocks are mitigated to the extent that they are common across member states can be reversed. Countries can be worse off when their neighbors experience similar shocks, including policy-driven reductions in government spending.

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This chapter was published in:
  • Richard Clarida & Francesco Giavazzi, 2011. "NBER International Seminar on Macroeconomics 2010," NBER Books, National Bureau of Economic Research, Inc, number clar10-1.
  • This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 12213.
    Handle: RePEc:nbr:nberch:12213
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