Structural Transformation, Monetary Conflict, and Fiscal Capacity in a Currency Union

Giovanni Di Bartolomeo ()

No 207, CIMEO Working Paper Series from Centre for Investigation and Modelling of Experimental Observations (CIMEO)

Abstract: We study a currency union facing a common structural transformation. In a stylized two-country framework with reduced-form import leakage, incomplete nominal adjustment, and sectoral capacity constraints, the same union-wide shift can move national reallocation frontiers differently. Countries may then disagree over the preferred common monetary stance even though the primitive disturbance is common. Locally, the common-instrument cost is proportional to the squared distance between national preferred stances, weighted by country size and frontier curvature. Fiscal capacity operates through two distinct margins: transfers compensate countries along given frontiers, whereas procurement and capacity investment can move those frontiers and reduce the underlying monetary disagreement.

Keywords: optimum currency areas; currency union; monetary conflict; fiscal capacity; structural transformation; sectoral reallocation; policy costs (search for similar items in EconPapers)
JEL-codes: E52 E58 F33 F45 (search for similar items in EconPapers)
Date: 2026
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Persistent link: https://EconPapers.repec.org/RePEc:ter:wpaper:00207

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