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Which policy-mix to mitigate the effects of financial heterogeneity in a monetary union?

Author

Listed:
  • Christina Badarau

    (Larefi)

  • Grégory Levieuge

    (LEO universite d'Orleans)

Abstract

This paper aims to study a suitable policy-mix for a monetary union like the euro area, in a context of financial heterogeneity. It relies on a DSGE model with empirically-justified heterogeneous bank capital channel, with financial shocks, in addition to monetary, budgetary and technological ones. The analysis leads to the following conclusions. A centralized monetary policy appears to be more advantageous for the union than an alternative inflation-divergences oriented policy. Besides, national budgetary policies can mitigate cyclical divergences. Nevertheless, the exam of various policy-mixes indicates that the superiority of a cooperative budgetary regime only relies on the fact that it allows a better stabilization of public spending divergences in the Union. On the other hand, national variables are less stabilized under this regime. These results are finally discussed in light of the subprime mortgage crisis context.

Suggested Citation

  • Christina Badarau & Grégory Levieuge, 2011. "Which policy-mix to mitigate the effects of financial heterogeneity in a monetary union?," Larefi Working Papers 201109, Larefi, Université Bordeaux 4.
    • Handle: RePEc:laf:wpaper:201109
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    References listed on IDEAS

    as
    1. Chen, Nan-Kuang, 2001. "Bank net worth, asset prices and economic activity," Journal of Monetary Economics, Elsevier, vol. 48(2), pages 415-436, October.
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    3. Muscatelli, V. Anton & Tirelli, Patrizio & Trecroci, Carmine, 2004. "Fiscal and monetary policy interactions: Empirical evidence and optimal policy using a structural New-Keynesian model," Journal of Macroeconomics, Elsevier, vol. 26(2), pages 257-280, June.
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    5. Alves, Nuno, 2008. "The mechanics of a monetary union with segmented financial markets," Journal of Macroeconomics, Elsevier, vol. 30(1), pages 346-368, March.
    6. Cristina Badarau-Semenescu, & Gregory Levieuge, 2010. "Assessing the Potential Strength of a Bank Capital Channel in Europe: A Principal Component Analysis," The Review of Finance and Banking, Academia de Studii Economice din Bucuresti, Romania / Facultatea de Finante, Asigurari, Banci si Burse de Valori / Catedra de Finante, vol. 2(1), pages 005-016, June.
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    8. Andersen, Torben M., 2005. "Fiscal stabilization policy in a monetary union with inflation targeting," Journal of Macroeconomics, Elsevier, vol. 27(1), pages 1-29, March.
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    Cited by:

    1. Julia Durcova, 2021. "The Impact of Interest Rate Transmission Channel on the Prices Development in the Eurozone Countries," Montenegrin Journal of Economics, Economic Laboratory for Transition Research (ELIT), vol. 17(2), pages 23-35.
    2. Cristina Badarau & Eleonora Cavallaro & Stefania Stancu, 2025. "Corporate debt structure and monetary policy transmission: a general equilibrium approach," Working Papers 2025.21, International Network for Economic Research - INFER.
    3. Cristina Badarau & Alexandra Popescu, 2015. "Monetary policy and financial stability: what role for the interest rate?," International Economics and Economic Policy, Springer, vol. 12(3), pages 359-374, September.

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    Keywords

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    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

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