Liquidity-constrained consumers and optimal monetary policy in a currency union

Daisuke Ida

Journal of International Money and Finance, 2023, vol. 131, issue C

Abstract: This paper examines optimal monetary policy in a currency union model with liquidity-constrained (LC) consumers. The result demonstrates that given LC consumers in the home country, the response of macroeconomic variables to a foreign structural shock is generally dampened as a share of foreign LC consumers increases. This paper finds that the costs of discretionary policy are generally not greater in a currency union in which LC consumers exist in both countries. We address that the presence of nominal wage rigidity significantly lowers welfare losses in our model.

Keywords: Optimal monetary policy; Liquidity-constrained consumers; Currency union; Nominal wage rigidity; Two-country new Keynesian model (search for similar items in EconPapers)
JEL-codes: E52 E58 F41 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:131:y:2023:i:c:s0261560622001905

DOI: 10.1016/j.jimonfin.2022.102787

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