Uncertainty shocks in currency unions

Benjamin Born, Müller, Gernot and Johannes Pfeifer
Authors registered in the RePEc Author Service: Gernot J. Müller

No 15579, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Uncertainty shocks cause economic activity to contract and more so, if monetary policy is constrained by an effective lower bound on interest rates. In this paper, we investigate whether countries within currency unions are also particularly prone to suffer from the adverse effects of heightened uncertainty because they lack monetary independence. First, we estimate a Bayesian VAR on quarterly time series for Spain. We find that country-specific uncertainty shocks impact economic activity adversely. Second, we calibrate a DSGE model of a small open economy and show that it is able to account for the evidence. Finally, we show that currency-union membership strongly reduces the effects of uncertainty shocks because it anchors long-run expectations of the price level and thus alleviates precautionary price setting in the face of increased uncertainty.

Keywords: Uncertainty shocks; Exchange rate regime; Monetary policy; Euro area; Euro crisis (search for similar items in EconPapers)
JEL-codes: E44 F41 (search for similar items in EconPapers)
Date: 2020-12
New Economics Papers: this item is included in nep-dge, nep-eec, nep-mac, nep-mon and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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