IDEAS home Printed from https://ideas.repec.org/p/upf/upfgen/1883.html
   My bibliography  Save this paper

Fragmented monetary unions

Author

Listed:

Abstract

We provide a theory of financial fragmentation in monetary unions. Our key insight is that currency unions may experience of symmetry: that is episodes in which identical countries react differently when exposed to the same shock. During these events part of the union suffers a capital flight, while the rest acts as a safe haven and receives inflows. The central bank then faces a difficult trade-off between containing unemploymnet in capital-flight countries, and inflationary pressures in safe-haven ones. By counteracting private capital flows with public ones, unconventional monetary interventions mitigate the impact of financial fragmentation on employment and inflation, thus helping the central bank to fulfill its price stability mandate.

Suggested Citation

  • Luca Fornaro & Christoph Grosse-Steffen, 2024. "Fragmented monetary unions," Economics Working Papers 1883, Department of Economics and Business, Universitat Pompeu Fabra.
    • Handle: RePEc:upf:upfgen:1883
    as

    Download full text from publisher

    File URL: https://econ-papers.upf.edu/papers/1883.pdf
    File Function: Whole Paper
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Eaton, Jonathan, 1987. "Public Debt Guarantees and Private Capital Flight," The World Bank Economic Review, World Bank, vol. 1(3), pages 377-395, May.
    2. Gali­, Jordi & Monacelli, Tommaso, 2008. "Optimal monetary and fiscal policy in a currency union," Journal of International Economics, Elsevier, vol. 76(1), pages 116-132, September.
    3. Vayanos, Dimitri & Gourinchas, Pierre-Olivier & Ray, Walker, 2022. "A Preferred-Habitat Model of Term Premia, Exchange Rates, and Monetary Policy Spillovers," CEPR Discussion Papers 17119, C.E.P.R. Discussion Papers.
    4. Luca Fornaro, 2022. "A Theory of Monetary Union and Financial Integration," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 89(4), pages 1911-1947.
    5. Mark Aguiar & Manuel Amador & Emmanuel Farhi & Gita Gopinath, 2015. "Coordination and Crisis in Monetary Unions," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 130(4), pages 1727-1779.
    6. Dedola, Luca & Karadi, Peter & Lombardo, Giovanni, 2013. "Global implications of national unconventional policies," Journal of Monetary Economics, Elsevier, vol. 60(1), pages 66-85.
    7. Mark Gertler & Nobuhiro Kiyotaki & Andrea Prestipino, 2020. "A Macroeconomic Model with Financial Panics," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 87(1), pages 240-288.
    8. Nicola Gennaioli & Alberto Martin & Stefano Rossi, 2014. "Sovereign Default, Domestic Banks, and Financial Institutions," Journal of Finance, American Finance Association, vol. 69(2), pages 819-866, April.
    9. Luca Fornaro, 2018. "International Debt Deleveraging," Journal of the European Economic Association, European Economic Association, vol. 16(5), pages 1394-1432.
    10. Broner, Fernando & Erce, Aitor & Martin, Alberto & Ventura, Jaume, 2014. "Sovereign debt markets in turbulent times: Creditor discrimination and crowding-out effects," Journal of Monetary Economics, Elsevier, vol. 61(C), pages 114-142.
    11. Kiminori Matsuyama, 2004. "Financial Market Globalization, Symmetry-Breaking, and Endogenous Inequality of Nations," Econometrica, Econometric Society, vol. 72(3), pages 853-884, May.
    12. Giancarlo Corsetti & Luca Dedola, 2016. "The Mystery of the Printing Press: Monetary Policy and Self-Fulfilling Debt Crises," Journal of the European Economic Association, European Economic Association, vol. 14(6), pages 1329-1371.
    13. Benigno, Pierpaolo, 2004. "Optimal monetary policy in a currency area," Journal of International Economics, Elsevier, vol. 63(2), pages 293-320, July.
    14. Matsuyama, Kiminori, 1996. "Why Are There Rich and Poor Countries? Symmetry-Breaking in the World Economy," Journal of the Japanese and International Economies, Elsevier, vol. 10(4), pages 419-439, December.
    15. John Grigsby & Erik Hurst & Ahu Yildirmaz, 2021. "Aggregate Nominal Wage Adjustments: New Evidence from Administrative Payroll Data," American Economic Review, American Economic Association, vol. 111(2), pages 428-471, February.
    16. Roland Beck & Antonio Coppola & Angus J. Lewis & Matteo Maggiori & Martin Schmitz & Jesse Schreger, 2024. "The Geography of Capital Allocation in the Euro Area," NBER Working Papers 32275, National Bureau of Economic Research, Inc.
    17. Velasco, Andres, 1996. "Animal spirits, investment and international capital movements," Journal of International Money and Finance, Elsevier, vol. 15(2), pages 221-237, April.
    18. George A. Akerlof & William R. Dickens & George L. Perry, 1996. "The Macroeconomics of Low Inflation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(1), pages 1-76.
    19. Engler, Philipp & Große Steffen, Christoph, 2016. "Sovereign risk, interbank freezes, and aggregate fluctuations," European Economic Review, Elsevier, vol. 87(C), pages 34-61.
    20. Daron Acemoglu & James A. Robinson & Thierry Verdier, 2017. "Asymmetric Growth and Institutions in an Interdependent World," Journal of Political Economy, University of Chicago Press, vol. 125(5), pages 1245-1305.
    21. Jonathon Hazell & Bledi Taska, 2020. "Downward Rigidity in the Wage for New Hires," Discussion Papers 2028, Centre for Macroeconomics (CFM).
    22. Javier Bianchi & Jorge Mondragon, 2022. "Monetary Independence and Rollover Crises," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 137(1), pages 435-491.
    23. Luigi Bocola & Alessandro Dovis, 2019. "Self-Fulfilling Debt Crises: A Quantitative Analysis," American Economic Review, American Economic Association, vol. 109(12), pages 4343-4377, December.
    24. Luigi Bocola, 2016. "The Pass-Through of Sovereign Risk," Journal of Political Economy, University of Chicago Press, vol. 124(4), pages 879-926.
    25. Bacchetta, Philippe & Perazzi, Elena & van Wincoop, Eric, 2018. "Self-fulfilling debt crises: What can monetary policy do?," Journal of International Economics, Elsevier, vol. 110(C), pages 119-134.
    26. Giancarlo Corsetti & Luca Dedola, 2012. "The "Mystery of the Printing Press" Monetary Policy and Self-fulfilling Debt Crises," Discussion Papers 1424, Centre for Macroeconomics (CFM), revised Aug 2014.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Luca Fornaro & Christoph Grosse-Steffen, 2024. "Fragmented Monetary Unions," Working Papers 1437, Barcelona School of Economics.
    2. Galli, Carlo, 2021. "Self-fulfilling debt crises, fiscal policy and investment," Journal of International Economics, Elsevier, vol. 131(C).
    3. Occhino, Filippo, 2017. "The 2012 eurozone crisis and the ECB’s OMT program: A debt-overhang banking and sovereign crisis interpretation," European Economic Review, Elsevier, vol. 100(C), pages 337-363.
    4. Luca Fornaro, 2022. "A Theory of Monetary Union and Financial Integration," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 89(4), pages 1911-1947.
    5. Kobielarz, Michal, 2018. "The economics of monetary unions," Other publications TiSEM b0293536-68ec-4905-bffd-6, Tilburg University, School of Economics and Management.
    6. Cornand, Camille & Gandré, Pauline & Gimet, Céline, 2016. "Increase in home bias in the Eurozone debt crisis: The role of domestic shocks," Economic Modelling, Elsevier, vol. 53(C), pages 445-469.
    7. Claudio Borio & Marc Farag & Fabrizio Zampolli, 2023. "Tackling the fiscal policy-financial stability nexus," BIS Working Papers 1090, Bank for International Settlements.
    8. Corsetti, Giancarlo & Maeng, Seung Hyun, 2020. "Debt Crises, Fast and Slow," CEPR Discussion Papers 14868, C.E.P.R. Discussion Papers.
    9. Irina Balteanu & Aitor Erce, 2018. "Linking Bank Crises and Sovereign Defaults: Evidence from Emerging Markets," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 66(4), pages 617-664, December.
    10. Engler, Philipp & Große Steffen, Christoph, 2016. "Sovereign risk, interbank freezes, and aggregate fluctuations," European Economic Review, Elsevier, vol. 87(C), pages 34-61.
    11. Giancarlo Corsetti, 2023. "Debt crises, fast and slow Giancarlo," RSCAS Working Papers 2023/15, European University Institute.
    12. Debrun, Xavier & Masuch, Klaus & Ferrero, Guiseppe & Vansteenkiste, Isabel & Ferdinandusse, Marien & von Thadden, Leopold & Hauptmeier, Sebastian & Alloza, Mario & Derouen, Chloé & Bańkowski, Krzyszto, 2021. "Monetary-fiscal policy interactions in the euro area," Occasional Paper Series 273, European Central Bank.
    13. Xuan Wang, 2019. "When Do Currency Unions Benefit From Default ?," 2019 Papers pwa938, Job Market Papers.
    14. Cristina Arellano & Gabriel Mihalache & Yan Bai, 2018. "Inflation Targeting with Sovereign Default Risk," 2018 Meeting Papers 851, Society for Economic Dynamics.
    15. Xuan Wang, 2021. "Bankruptcy Codes and Risk Sharing of Currency Unions," Tinbergen Institute Discussion Papers 21-009/IV, Tinbergen Institute.
    16. Romei, Federica & de Ferra, Sergio, 2018. "Sovereign Default in a Monetary Union," CEPR Discussion Papers 12976, C.E.P.R. Discussion Papers.
    17. Joao Ayres & Gaston Navarro & Juan Pablo Nicolini & Pedro Teles, 2019. "Self-Fulfilling Debt Crises with Long Stagnations," Working Papers 757, Federal Reserve Bank of Minneapolis.
    18. Anil Ari, 2015. "Sovereign Risk and Bank Risk-Taking," Working Papers 202, Oesterreichische Nationalbank (Austrian Central Bank).
    19. Corbisiero, Giuseppe, 2022. "Bank lending, collateral, and credit traps in a monetary union," European Economic Review, Elsevier, vol. 144(C).
    20. Irina Balteanu & Aitor Erce, 2014. "Banking crises and sovereign defaults in emerging markets: exploring the links," Working Papers 1414, Banco de España.

    More about this item

    Keywords

    Monetary unions; Euro area; fragmentation; optimal monetary policy in openeconomies; capital flows; fiscal crises; unconventional monetary policies; Inflation; endogenous breaking of symmetry; Optimum;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:upf:upfgen:1883. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: http://www.econ.upf.edu/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.