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Monetary Union, Even Higher Integration, or Back to National Currencies?

George Economides (), Apostolis Philippopoulos and Petros Varthalitis

CESifo Economic Studies, 2016, vol. 62, issue 2, 232-255

Abstract: This article quantifies the welfare differences among a monetary union, flexible exchange rates (economic disintegration) and a monetary plus fiscal transfer union (higher economic integration). The vehicle of analysis is a medium-scale New Keynesian DSGE model consisting of two heterogeneous countries. The model is solved using data from Germany and Italy. Our solutions imply that a switch to flexible exchange rates and independent monetary policies would have negligible welfare implications. A similar result applies when we add interregional fiscal transfers as insurance. By contrast, the addition of fiscal transfers as redistribution has non-trivial implications and these depend crucially on whether such one-sided transfers trigger moral hazard behavior. (JEL codes: E6, F3, H6)

Date: 2016
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