Financial heterogeneity and monetary union

Simon Gilchrist, Raphael Schoenle, Jae Sim and Egon Zakrajšek ()

Journal of Monetary Economics, 2023, vol. 139, issue C, 21-40

Abstract: During the 2010–12 eurozone crisis, deviations of price and wage dynamics from those implied by canonical Phillips curves were systematically related to differences in financial strains across countries. Most notably, markups in financially “weak” (periphery) countries rose, while those in financially “strong” (core) countries declined. In a monetary union model, where financial frictions interact with the firms’ pricing decisions because of customer-market considerations, firms in the periphery maintain cashflows in response to an adverse financial shock by raising markups in both domestic and export markets, while firms in the core reduce markups, undercutting their financially constrained competitors to gain market share. In this framework, a unilateral fiscal-devaluation-style policy by the periphery stabilizes the local economy by improving the condition of firm balance sheets and by boosting household demand—it does not, however, reverse the real exchange rate appreciation in the periphery.

Keywords: Eurozone; Financial crisis; Monetary union; Inflation; Markups; Customer markets; Fiscal devaluation (search for similar items in EconPapers)
JEL-codes: E31 E32 F44 F45 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Financial heterogeneity and monetary union (2023)
Working Paper: Financial Heterogeneity and Monetary Union (2018)
Working Paper: Financial Heterogeneity and Monetary Union (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:139:y:2023:i:c:p:21-40

DOI: 10.1016/j.jmoneco.2023.06.002

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