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Monetary policy and welfare in a currency union
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D’Aguanno, Lucio (2015) Monetary policy and welfare in a currency union. Working Paper. Coventry: University of Warwick. Department of Economics. Warwick economics research papers series (WERPS) (1082). (Unpublished)
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Official URL: https://www2.warwick.ac.uk/fac/soc/economics/resea...
Abstract
What are the welfare gains from being in a currency union? I explore this question in the context of a dynamic stochastic general equilibrium model with monetary barriers to trade, local currency pricing and incomplete markets. The model generates a trade off between monetary independence and monetary union. On one hand, distinct national monetary authorities with separate currencies can address business cycles in a country specific way, which is not possible for a single central bank. On the other hand, short-run violations of the law of one price and long-run losses of international trade occur if different currencies are adopted, due to the inertia of prices in local currencies and to the presence of trade frictions. I quantify the welfare gap between these two international monetary arrangements in consumption equivalents over the lifetime of households, and decompose it into the contributions of different frictions. I show that the welfare ordering of alternative currency systems depends crucially on the international correlation of macroeconomic shocks and on the strength of the monetary barriers affecting trade with separate currencies. I estimate the model on data from Italy, France, Germany and Spain using standard Bayesian tools, and I find that the trade off is resolved in favour of a currency union among these countries.
Item Type: | Working or Discussion Paper (Working Paper) | ||||
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Subjects: | H Social Sciences > HB Economic Theory H Social Sciences > HV Social pathology. Social and public welfare |
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Divisions: | Faculty of Social Sciences > Economics | ||||
Library of Congress Subject Headings (LCSH): | Monetary unions -- Italy -- France -- Germany -- Spain, Welfare economics -- Mathematical models | ||||
Series Name: | Warwick economics research papers series (WERPS) | ||||
Publisher: | University of Warwick. Department of Economics | ||||
Place of Publication: | Coventry | ||||
ISSN: | 0083-7350 | ||||
Official Date: | November 2015 | ||||
Dates: |
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Number: | 1082 | ||||
Number of Pages: | 40 | ||||
Institution: | University of Warwick | ||||
Status: | Not Peer Reviewed | ||||
Publication Status: | Unpublished | ||||
Access rights to Published version: | Restricted or Subscription Access | ||||
Date of first compliant deposit: | 27 January 2016 | ||||
Date of first compliant Open Access: | 24 February 2016 |
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