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Welfare implications of country size in a monetary union

  • Mykhaylova, Olena

This paper calculates differences in welfare costs of nominal rigidities in large and small EMU countries. I use a two-country DSGE model characterized by optimizing agents, monopolistic wage and price setting, distortionary taxes and government debt dynamics. I find that these costs are virtually identical for all members of the EMU, and small countries are not at a disadvantage when it comes to the setting of the common monetary policy. This conclusion is primarily due to highly correlated technological processes in Europe, which cause national and Euro-wide inflations to move together. These findings are robust to the asset market structure, trade openness, and different specifications of the Taylor rule.

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File URL: http://mpra.ub.uni-muenchen.de/23323/1/MPRA_paper_23323.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 23323.

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Date of creation: 31 Aug 2009
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Handle: RePEc:pra:mprapa:23323
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  16. Andrés, Javier & Ortega, Eva & Vallés, Javier, 2008. "Competition and inflation differentials in EMU," Journal of Economic Dynamics and Control, Elsevier, vol. 32(3), pages 848-874, March.
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  18. V.V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2000. "Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates?," NBER Working Papers 7869, National Bureau of Economic Research, Inc.
  19. Schmitt-Grohé, Stephanie & Uribe, Martín, 2002. "Closing Small Open Economy Models," CEPR Discussion Papers 3096, C.E.P.R. Discussion Papers.
  20. Duarte, Margarida & Wolman, Alexander L., 2008. "Fiscal policy and regional inflation in a currency union," Journal of International Economics, Elsevier, vol. 74(2), pages 384-401, March.
  21. Coenen, Günter & Straub, Roland, 2005. "Does government spending crowd in private consumption? Theory and empirical evidence for the euro area," Working Paper Series 0513, European Central Bank.
  22. Matthew B. Canzoneri & Robert E. Cumby & Behzad T. Diba, 2004. "The Cost of Nominal Inertia in NNS Models," NBER Working Papers 10889, National Bureau of Economic Research, Inc.
  23. Margarida Duarte, 2003. "The euro and inflation divergence in Europe," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 53-70.
  24. Matthew Canzoneri & Robert Cumby & Behzad Diba & Olena Mykhaylova, 2006. "New Keynesian Explanations of Cyclical Movements in Aggregate Inflation and Regional Inflation Differentials," Open Economies Review, Springer, vol. 17(1), pages 27-55, January.
  25. Cedric Tille, 1999. "The role of consumption substitutability in the international transmission of shocks," Staff Reports 67, Federal Reserve Bank of New York.
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