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

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.