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Welfare implications of country size in a monetary union

Olena Mykhaylova
Authors registered in the RePEc Author Service: Olena Staveley-O'Carroll ()

MPRA Paper from University Library of Munich, Germany

Abstract: This paper calculates differences in welfare costs of nominal rigidities in large and small EMU countries. I use a two-country DSGE model characterized by optimizing agents, monopolistic wage and price setting, distortionary taxes and government debt dynamics. I find that these costs are virtually identical for all members of the EMU, and small countries are not at a disadvantage when it comes to the setting of the common monetary policy. This conclusion is primarily due to highly correlated technological processes in Europe, which cause national and Euro-wide inflations to move together. These findings are robust to the asset market structure, trade openness, and different specifications of the Taylor rule.

Keywords: European monetary union; nominal rigidities; welfare costs (search for similar items in EconPapers)
JEL-codes: E31 E58 E63 F33 (search for similar items in EconPapers)
Date: 2009-08-31
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:23323

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