On the Benefits of a Monetary Union: does it pay to be bigger?
A two area dynamic stochastic general equilibrium model is employed to investigate the welfare implications of losing monetary independence. Two policy regimes are compared: (i) in one area there is a common currency, while in the other area countries still retain their autonomous monetary policy; (ii) there are two monetary unions. When chosen by national authorities, monetary policy can stabilize optimally the effects of country-specific shocks. However, in that case, policy decisions internalize neither the spillover effects on consumers living in the same area nor their impact on the world economy. Thus the adoption of a common currency implies a trade-off between the cost of not tailoring monetary policy to single country economic conditions and the gains entailed by the improvement upon the conduct of national monetary policies. Our results show that under markup shocks and plausible calibrations, there may be welfare gains from adopting a common currency.
|Date of creation:||Oct 2007|
|Date of revision:||May 2009|
|Contact details of provider:|| Postal: |
Phone: +41 21 693 00 77
Fax: +41 21 693 00 60
Web page: http://cfi.epfl.ch/
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:cif:wpaper:200903. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Corinne Dubois)
If references are entirely missing, you can add them using this form.