Which policy-mix to mitigate the effects of financial heterogeneity in a monetary union?

Cristina Badarau and Grégory Levieuge

No 1109, Larefi Working Papers from Larefi, Université Bordeaux 4

Abstract: This paper aims to study a suitable policy-mix for a monetary union like the euro area, in a context of financial heterogeneity. It relies on a DSGE model with empirically-justified heterogeneous bank capital channel, with financial shocks, in addition to monetary, budgetary and technological ones. The analysis leads to the following conclusions. A centralized monetary policy appears to be more advantageous for the union than an alternative inflation-divergences oriented policy. Besides, national budgetary policies can mitigate cyclical divergences. Nevertheless, the exam of various policy-mixes indicates that the superiority of a cooperative budgetary regime only relies on the fact that it allows a better stabilization of public spending divergences in the Union. On the other hand, national variables are less stabilized under this regime. These results are finally discussed in light of the subprime mortgage crisis context.

Keywords: euro area; financial heterogeneity; monetary/budgetary policy rules; DSGE model. (search for similar items in EconPapers)
JEL-codes: C61 E44 E58 E63 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2011-02
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Which policy-mix to mitigate the effects of financial heterogeneity in a monetary union? (2011)
Working Paper: Which policy-mix to mitigate the effects of the financial heterogeneity in a monetary union? (2010)
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