Joining the European Monetary Union - Comparing First and Second Generation Open Economy Models

A. Patrick Minford and Vo Phuong Mai Le

No 5615, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We log-linearise the Dellas and Tavlas (DT) model of monetary union and solve it analytically. We find that the intuition of optimal currency analysis of DT's second generation open economy model is essentially the same as that of first generation models. Monetary union results in no welfare loss if its member states are symmetric. However, asymmetry causes loss in welfare both due to the failure of the union policy to deal suitably with a country's asymmetric shocks and due to an active monetary policy by union in pursuit of its distinct objectives. The asymmetry in DT is largely due to the differing wage rigidities across countries.

Keywords: Monetary union; Representative agent model; Multi-country model; Wage rigidity; Asymmetry (search for similar items in EconPapers)
JEL-codes: E42 F41 F42 (search for similar items in EconPapers)
Date: 2006-04
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (8)

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Journal Article: Joining the European Monetary Union—Comparing First and Second Generation Open Economy Models (2006)
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