Asymmetric shocks and monetary union

Martine Carré and Fabrice Collard
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Fabrice Collard: CEPREMAP

Cahiers de la Maison des Sciences Economiques from Université Panthéon-Sorbonne (Paris 1)

Abstract: This article intends to study the potential benefit of moving from a flexible exchange rate regime to a monetary union. To this end, we develop a two countries intertemporal general equilibrium model. We extend the Obstfeld and Rogoff (1995a) specification by introducing both physical capital accumulation and nominal rigidities through price adjustment costs within a monopolistic competition framework. We show that instituting a monetary union allows to reduce the wealth gaps between countries following asymmetric technology and fiscal shocks, whenever their persistence is high enough. We then establish that as nominal rigidities increase, the gain from implementing a monetary union decreases in the presence of asymmetric technology shocks, whereas it increases in the presence of fiscal shocks

Keywords: Asymmetrical shocks; exchange rate regimes; monetary union (search for similar items in EconPapers)
JEL-codes: F41 F42 (search for similar items in EconPapers)
Pages: 31 pages
Date: 1998-01
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Related works:
Working Paper: Asymmetric Shocks and Monetary Union (1998)
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Persistent link: https://EconPapers.repec.org/RePEc:mse:wpsorb:98025

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