EconPapers    
Economics at your fingertips  
 

On Financial Market Incompleteness, Price Stickiness, and Welfare in a Monetary Union

Stéphane Auray and Aurélien Eyquem

Annals of Economics and Statistics, 2013, issue 109-110, 205-233

Abstract: The paper builds a two-country model of a monetary union with home bias and price stickiness. Incompleteness of financial asset markets is allowed. In this environment, we derive the solution for optimal behavior by the monetary policymaker and show that welfare can be higher under incomplete markets than under complete markets. The argument is a second-best one. In a monetary union with equal nominal rigidity across countries, optimal monetary policy stabilizes aggregate, union-wide inflation, but cannot fully stabilize the country-level inflation rates. Market incompleteness results in less volatility of the terms of trade because part of the adjustment goes through the current account), and hence less volatile national inflation rates. Through this channel, welfare ends up being higher under incomplete markets. These results are also robust when nominal rigidity differs across countries and when the form of the monetary policy is modified.

Date: 2013
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.jstor.org/stable/23646432 (text/html)

Related works:
Working Paper: On Financial Markets Incompleteness, Price Stickiness and Welfare in a Monetary Union (2013)
Working Paper: On Financial Markets Incompleteness, Price Stickiness, and Welfare in a Monetary Union (2009) Downloads
Working Paper: On financial markets incompleteness, price stickiness and welfare in a monetary union (2008)
Working Paper: On Financial Markets Incompleteness, Price Stickiness, and Welfare in a Monetary Union (2007) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:adr:anecst:y:2013:i:109-110:p:205-233

Access Statistics for this article

Annals of Economics and Statistics is currently edited by Laurent Linnemer

More articles in Annals of Economics and Statistics from GENES Contact information at EDIRC.
Bibliographic data for series maintained by Secretariat General () and Laurent Linnemer ().

 
Page updated 2025-03-22
Handle: RePEc:adr:anecst:y:2013:i:109-110:p:205-233