Monetary policy and the financial accelerator in a monetary union
Simon Gilchrist (),
Jean-Olivier Hairault () and
Hubert Kempf ()
No 750, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)
In this paper, we consider the effect of a monetary union in a model with a significant role for financial market imperfections. We do so by introducing a financial accelerator into a stochastic general equilibrium macro model of a two country economy. We show that financial market imperfections introduce important cross-country transmission mechanisms to asymmetric shocks to supply and demand. Within this framework, we study the likely costs and benefits of monetary union. We also consider the effects of cross-country heterogeneity in financial markets. Both the presence of financial frictions and the use of a single currency have significant impacts on the international propagation of exogenous shocks. The introduction of asymmetries in the financial contract widens the difference in cyclical behavior of national economies in a monetary union, but financial integration compensates the loss of policy instruments.
Keywords: International finance; Monetary unions (search for similar items in EconPapers)
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