Monetary Union, Asymmetric Recession, and Exit

Christian Keuschnigg

No 2206, Economics Working Paper Series from University of St. Gallen, School of Economics and Political Science

Abstract: We propose a New Keynesian DSGE model of the Eurozone and analyze an asymmetric recession in a vulnerable member state characterized by a trilemma of high public debt, weak banks, and deteriorating competitiveness. We compare macroeconomic adjustment under continued membership with two exit scenarios that introduce flexible exchange rates and autonomous monetary policy. An exit with stable investor expectations could significantly dampen the short-run impact. Stabilization is achieved by a targeted monetary expansion combined with depreciation. However, investor panic may lead to escalation, aggravate the recession and delay the recovery.

Keywords: Currency union; exchange rate flexibility; fiscal consolidation; sovereign debt; banks (search for similar items in EconPapers)
JEL-codes: E42 E44 E60 F30 F36 F45 G15 G21 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2022-08
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-eec, nep-fdg, nep-mon and nep-opm
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http://ux-tauri.unisg.ch/RePEc/usg/econwp/EWP-2206.pdf (application/pdf)

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Journal Article: Monetary union, asymmetric recession, and exit (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:usg:econwp:2022:06

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