Anchored in Troubled Waters: Monetary Unions and Uncertainty

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

No 15579, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: A monetary union shapes the impact of uncertainty on the economy: it does not alter the transmission of common uncertainty shocks, but significantly dampens the adverse effects of country-specific shocks. We establish this result based on time series data for 17 euro-area countries and 13 countries with flexible exchange rates. To rationalize it, we propose a model of a monetary union in which monetary policy responds to common shocks but not to country-specific ones, as each member country is small. The union dampens the effect of country-specific shocks by providing a nominal anchor in the face of country-specific uncertainty, thereby eliminating price level risk.

Keywords: Uncertainty shocks; Exchange rate regime; Monetary policy; Euro area; Euro crisis; Nominal anchor; Price level risk (search for similar items in EconPapers)
JEL-codes: E44 F41 F45 (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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