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Monetary policy and the financial accelerator in a monetary union

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Listed:
  • Simon Gilchrist
  • Jean-Olivier Hairault
  • Hubert Kempf

Abstract

In this paper, we consider the effect of a monetary union in a model with a significant role for financial market imperfections. We do so by introducing a financial accelerator into a stochastic general equilibrium macro model of a two country economy. We show that financial market imperfections introduce important cross-country transmission mechanisms to asymmetric shocks to supply and demand. Within this framework, we study the likely costs and benefits of monetary union. We also consider the effects of cross-country heterogeneity in financial markets. Both the presence of financial frictions and the use of a single currency have significant impacts on the international propagation of exogenous shocks. The introduction of asymmetries in the financial contract widens the difference in cyclical behavior of national economies in a monetary union, but financial integration compensates the loss of policy instruments.

Suggested Citation

  • Simon Gilchrist & Jean-Olivier Hairault & Hubert Kempf, 2002. "Monetary policy and the financial accelerator in a monetary union," International Finance Discussion Papers 750, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgif:750
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    References listed on IDEAS

    as
    1. Stephen G. Cecchetti, 2001. "Legal Structure, Financial Structure and the Monetary Policy Transmission Mechanism," Palgrave Macmillan Books, in: Deutsche Bundesbank (ed.), The Monetary Transmission Process, chapter 5, pages 170-207, Palgrave Macmillan.
    2. Faia, Ester, 2001. "Stabilization policy in a two country model and the role of financial frictions," Working Paper Series 56, European Central Bank.
    3. Gabriele Galati & Kostas Tsatsaronis, 2001. "The impact of the euro on Europe's financial markets," BIS Working Papers 100, Bank for International Settlements.
    4. Townsend, Robert M., 1979. "Optimal contracts and competitive markets with costly state verification," Journal of Economic Theory, Elsevier, vol. 21(2), pages 265-293, October.
    5. Mark Gertler & Simon Gilchrist & Fabio M. Natalucci, 2007. "External Constraints on Monetary Policy and the Financial Accelerator," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(2‐3), pages 295-330, March.
    6. Anil K. Kashyap & Jeremy C. Stein, 1997. "The role of banks in monetary policy: a survey with implications for the European Monetary Union," Economic Perspectives, Federal Reserve Bank of Chicago, vol. 22(Sep), pages 2-18.
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    More about this item

    Keywords

    International finance; monetary unions;

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • F0 - International Economics - - General

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