When do Countries Benefit from Forming a Monetary Union?

Dominik Groll

VfS Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order from Verein für Socialpolitik / German Economic Association

Abstract: The New Keynesian DSGE literature has come to the consensus that, from the perspective of business cycle stabilization, countries are worse off in terms of welfare by forming a monetary union. This consensus, however, is based on the assumption of monetary policy being optimal. Using a standard two-country model, this paper shows that under suboptimal monetary policy, countries may gain in welfare by forming a monetary union, highlighting an important inherent benefit of fixing the exchange rate. Whether countries benefit from a monetary union depends primarily on the degree of price stickiness and how monetary policy is conducted: If prices are rather sticky and if monetary policy is not very aggressive towards inflation, forming a monetary union is beneficial. In contrast, asymmetries in the degree of price stickiness between countries are not of any importance for a monetary union to be welfare-enhancing or not.

JEL-codes: E52 F33 F41 (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac, nep-mon and nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:vfsc13:79787

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