Asymmetric Shocks and Monetary Union
This article intends to study the potential benefit of moving from a flexible exchange rate regime to a monetary union. To this end, we develop a two countries intertemporal general equilibrium model. We extend the Obstfeld and Rogoff [1995a] specification by introducing both physical capital accumulation and nominal rigidities through price adjustment costs within a monopolistic competition framework. We show that instituting a monetary union allows to reduce the wealth gaps between countries following asymmetric technology and fiscal shocks, whenever their persistence is high enough.
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