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Welfare effects of a monetary union: the role of trade openness

  • Robert Kollmann

This paper evaluates the welfare effects of a monetary union (MU), compared to a floating exchange rate regime, using a quantitative business cycle model of a two-country world with sticky prices. It is assumed that, under a float, there are shocks to the uncovered interest rate parity (UIP) condition. These shocks are shown to have a negative effect on welfare-the detrimental effect is stronger, the higher the degree of trade openness. A MU eliminates UIP shocks, and it may thus raise welfare. The welfare gain from MU is positively linked to openness. (JEL: E4, F3, F4) Copyright (c) 2004 The European Economic Association.

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Paper provided by ULB -- Universite Libre de Bruxelles in its series ULB Institutional Repository with number 2013/7626.

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Date of creation: 2004
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Publication status: Published in: European Economic Association. Journal (2004) v.2,p.289-301
Handle: RePEc:ulb:ulbeco:2013/7626
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