Fragmented Monetary Unions

Luca Fornaro and Christoph Grosse Steffen

No 19171, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We provide a theory of financial fragmentation in monetary unions. Our key insight is that currency unions may experience endogenous breakings 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 capital inflows. The central bank then faces a difficult trade-off between containing unemployment in capital-flight countries, and inflationary pressures in safe-haven ones. By counteracting private capital flows with public ones, anti-fragmentation monetary programs mitigate the impact of financial fragmentation on employment and inflation, thus helping the central bank to fulfill its price stability mandate.

Keywords: Monetary unions; Euro area; Fragmentation; Capital flows; Fiscal crises; Optimum currency area; Inflation (search for similar items in EconPapers)
JEL-codes: E31 E52 F32 F41 F42 F45 (search for similar items in EconPapers)
Date: 2024-06
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Related works:
Working Paper: Fragmented monetary unions (2025)
Working Paper: Fragmented Monetary Unions (2024)
Working Paper: Fragmented Monetary Unions (2024)
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