Fragmented Monetary Unions

Christoph Grosse-Steffen and Luca Fornaro

No 1437, Working Papers from Barcelona School of Economics

Abstract: We provide a theory of ï¬ nancial fragmentation in monetary unions. Our key insight is that currency unions may experience endogenous breakings of symmetry: that is episodes in which identical countries react differently when exposed to the same shock. During these events part of the union suffers a capital flight, while the rest acts as a safe haven and receives capital inflows. The central bank then faces a difficult trade-off between containing unemployment in capital-flight countries, and inflationary pressures in safe-haven ones. By counteracting private capital flows with public ones, anti-fragmentation monetary programs mitigate the impact of ï¬ nancial fragmentation on employment and inflation, thus helping the central bank to fulï¬ ll its price stability mandate.

Keywords: Capital flows; unconventional monetary policies; euro area; inflation; Monetary unions; fragmentation; optimal monetary policy in openeconomies; fiscal crises; endogenous breaking of symmetry; optimum currency areas (search for similar items in EconPapers)
JEL-codes: E31 E52 F32 F41 F42 F45 (search for similar items in EconPapers)
Date: 2024-04
New Economics Papers: this item is included in nep-ban, nep-cba, nep-eec, nep-fdg, nep-ifn, nep-mon and nep-opm
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Working Paper: Fragmented Monetary Unions (2024)
Working Paper: Fragmented monetary unions (2024)
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