Stabilization of supply shocks in a structurally heterogeneous monetary union✰

Séverine Menguy

Research in Economics, 2023, vol. 77, issue 3, 362-389

Abstract: The paper provides accurate theoretical results regarding the consequences of heterogeneities between the preferences or between the structural parameters of the member countries of a monetary union on monetary and fiscal policies, and on the stabilization of economic activity and inflation, in case of supply shocks. Economic activity and inflation are higher (smaller) in a country affected by a positive (negative) symmetric or asymmetric supply shock, despite the more contractionary (expansionary) fiscal policy in this country. In this context, we find that monetary unification could be more painful for a country with a small preference for stabilizing the budget deficit or economic activity, and on the contrary with a high preference for stabilizing inflation. Besides, regarding structural heterogeneities, monetary unification could be more painful for a country with strong transmission mechanisms of monetary policy or with a small budget multiplier. Membership in a monetary union could also be more painful for a country with a high (if the shock is symmetric) or small (if the shock is asymmetric) sensitivity of national prices to foreign prices. Regarding symmetric supply shocks, it could also be more painful for a country with a high sensitivity of national prices to national economic activity, or with a small sensitivity of its demand to foreign activity.

Keywords: Monetary union; Asymmetric supply shock; Symmetric supply shock; Economic stabilization (search for similar items in EconPapers)
JEL-codes: E63 F44 F45 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1090944323000443
Full text for ScienceDirect subscribers only

Related works:
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:eee:reecon:v:77:y:2023:i:3:p:362-389

DOI: 10.1016/j.rie.2023.06.005

Access Statistics for this article

Research in Economics is currently edited by Federico Etro

More articles in Research in Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().