Welfare Reversals in a Monetary Union

Stéphane Auray and Aurélien Eyquem

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Abstract: We show that welfare can be lower under complete financial markets than under autarky in a monetary union with home bias, sticky prices, and asymmetric shocks. Such a monetary union is a second-best environment in which the structure of financial markets affects risk-sharing but also shapes the dynamics of inflation rates and the welfare costs from nominal rigidities. Welfare reversals arise for a variety of empirically plausible degrees of price stickiness when the Marshall-Lerner condition is met. These results carry over a model with active fiscal policies, and hold within a medium-scale model, although to a weaker extent.

Keywords: Monetary Union; Financial Markets Incompleteness; Sticky Prices; Fiscal and Monetary Policy (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (13)

Published in American Economic Journal: Macroeconomics, 2014, 6 (4), pp.246-290. ⟨10.1257/mac.6.4.246⟩

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Related works:
Journal Article: Welfare Reversals in a Monetary Union (2014)
Working Paper: Welfare Reversals in a Monetary Union (2014)
Working Paper: Welfare Reversals in a Monetary Union (2013)
Working Paper: Welfare Reversal in Monetary Union (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:halshs-00957984

DOI: 10.1257/mac.6.4.246

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