Household Heterogeneity across Countries and Optimal Monetary Policy in a Monetary Union

Benjamin Schwanebeck () and Luzie Thiel ()
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Benjamin Schwanebeck: FernUniversität in Hagen, Germany
Luzie Thiel: University of Kassel, Germany

MAGKS Papers on Economics from Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung)

Abstract: The financial situation of households differs substantially across countries, but the implications of this heterogeneity are still vastly understudied. We examine the implications of this asymmetry for optimal monetary policy in a currency union. We build a two-country monetary union model with heterogeneous households leading to inequality due to imperfect insurance. Money is introduced through central bank digital currency (CBDC) as a liquid asset to self-insure against idiosyncratic risk. CBDC is a new instrument which allows the central bank to target heterogeneity within a monetary union. We derive a welfare function with two additional objectives, consumption inequality within and across countries. The more heterogeneous households are, the less important inflation stabilization becomes in favor of stabilizing consumption inequality through providing money. Our research provides important policy implications as we show that it is beneficial for a monetary union to have a country-specific instrument to compensate for country differentials.

Keywords: Heterogeneous Households; Imperfect Insurance; Optimal Monetary Policy; Monetary Union; Two-Country Model (search for similar items in EconPapers)
JEL-codes: E52 E61 F45 (search for similar items in EconPapers)
Pages: 58 pages
Date: 2025-04-08
New Economics Papers: this item is included in nep-eec and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:mar:magkse:202512

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