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Asymmetric shocks in a currency union with monetary and fiscal handcuffs?

Listed author(s):
  • 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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File URL: http://www.federalreserve.gov/pubs/ifdp/2010/1012/default.htm
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File URL: http://www.federalreserve.gov/pubs/ifdp/2010/1012/ifdp1012.pdf
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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 1012.

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Date of creation: 2010
Handle: RePEc:fip:fedgif:1012
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  10. Thomas Laubach, 2011. "Fiscal Policy and Interest Rates: The Role of Sovereign Default Risk," NBER International Seminar on Macroeconomics, University of Chicago Press, vol. 7(1), pages 7-30.
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  16. Gauti B. Eggertsson, 2009. "What fiscal policy is effective at zero interest rates?," Staff Reports 402, Federal Reserve Bank of New York.
  17. Malin Adolfson & Stefan Laséen & Jesper Lindé & Mattias Villani, 2005. "The Role of Sticky Prices in an Open Economy DSGE Model: A Bayesian Investigation," Journal of the European Economic Association, MIT Press, vol. 3(2-3), pages 444-457, 04/05.
  18. Evans, Paul, 1985. "Do Large Deficits Produce High Interest Rates?," American Economic Review, American Economic Association, vol. 75(1), pages 68-87, March.
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