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Assessing the Effects of Financial Heterogeneity in a Monetary Union : A DSGE Approach

  • Christina Badarau

    ()

    (Larefi, Université Bordeaux IV)

  • Grégory Levieuge

    (LEO,Université d'Orléans)

The aim of this article is to analyze how financial heterogeneity can accentuate the cyclical divergences inside a monetary union that faces technological, monetary and financial shocks. To this purpose, this study relies on a two-country Dynamic Stochastic General Equilibrium model, where the two countries are supposed to be differently sensitive to the bank capital channel. The model allows us to demonstrate how a given symmetric shock causes cyclical divergences inside a heterogeneous monetary union. On this point, it allows reproducing some stylized facts recently observed in the UE. Moreover, it appears that the more heterogeneous the union, the larger the effects of financial asymmetries on the transmission of shocks. Finally, we show that a common monetary policy contributes to worsen cyclical divergences, in comparison with monetary policies that would be nationally conducted.

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Paper provided by Larefi, Université Bordeaux 4 in its series Larefi Working Papers with number 1108.

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Length: 33 pages
Date of creation: Mar 2011
Handle: RePEc:laf:wpaper:cr1108
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