PRICE LEVEL DETERMINATION IN A HETEROGENEOUS MONETARY UNION

Paul Bergin

No 94, Working Papers from University of California, Davis, Department of Economics

Abstract: A monetary union requires that a common central bank be shared among multiple nations, where governments and households may well be heterogeneous across national borders. A dynamic stochastic general equilibrium model of a two-country monetary union provides a natural setting in which to examine the implications of agent heterogeneity in government fiscal policies can be accommodated within a monetary union. Second, household heterogeneity gives monetary policy a reallocative dimension which affects price-level determination. For example, dissimilar preferences for holding money tend to enhance the potency of a monetary contraction to lower inflation. Fiscal federalism may reverse this effect.

Pages: 33
Date: 2003-01-08
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