Markets Integration and Macroeconomic Dispersion in a Monetary Union
Using a two country DGSE combining nominal rigidities and financial frictions, we show that the persistence of output and inflation asymmetries observed since 1999 in an increasingly integrated EMU is not necessarily puzzling. Only the integration of final goods markets unambiguously leads to a reduction of asymmetries while the integration of final goods markets and the integration of financial markets increase the dispersion of inflation rates and business cycles. The result builds on the intensive use of financial markets, i.e. the current account, to adjust externally and smooth the consequences of asymmetric shocks. This mechanism implies a disconnection of country-level outputs and /or inflation rates to ensure that agents return to their initial asset position in the long run.
|Date of creation:||01 Mar 2010|
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