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Structural Transformation, Monetary Conflict, and Fiscal Capacity in a Currency Union

Author

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  • Giovanni Di Bartolomeo

Abstract

We study a currency union facing a common structural transformation. In a stylized two-country framework with reduced-form import leakage, incomplete nominal adjustment, and sectoral capacity constraints, the same union-wide shift can move national reallocation frontiers differently. Countries may then disagree over the preferred common monetary stance even though the primitive disturbance is common. Locally, the common-instrument cost is proportional to the squared distance between national preferred stances, weighted by country size and frontier curvature. Fiscal capacity operates through two distinct margins: transfers compensate countries along given frontiers, whereas procurement and capacity investment can move those frontiers and reduce the underlying monetary disagreement.

Suggested Citation

  • Giovanni Di Bartolomeo, 2026. "Structural Transformation, Monetary Conflict, and Fiscal Capacity in a Currency Union," CIMEO Working Paper Series 207, Centre for Investigation and Modelling of Experimental Observations (CIMEO).
    • Handle: RePEc:ter:wpaper:00207
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    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions

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