On Financial Markets Incompleteness, Price Stickiness, and Welfare in a Monetary Union

CIRPEE Working Paper 07-48

29 Pages Posted: 24 Dec 2007

Date Written: December 2007

Abstract

In this paper, we measure the welfare costs/gains associated with financial market incompleteness in a monetary union. To do this, we build on a two-country model of a monetary union with sticky prices subject to asymmetric productivity shocks. For most plausible values of price stickiness, we show that asymmetric shocks under incomplete financial markets give rise to a lower volatility of national inflation rates, which proves welfare improving with respect to the situation of complete financial markets. The corresponding welfare gains are equivalent to an average increase of 1.8 percent of permanent consumption.

Keywords: Monetary union, asymmetric shocks, price stickiness, financial market incompleteness, welfare

JEL Classification: E51, E58, F36, F41

Suggested Citation

Auray, Stéphane and Eyquem, Aurélien, On Financial Markets Incompleteness, Price Stickiness, and Welfare in a Monetary Union (December 2007). CIRPEE Working Paper 07-48. Available at SSRN: https://ssrn.com/abstract=1077702 or http://dx.doi.org/10.2139/ssrn.1077702

Stéphane Auray (Contact Author)

CREST-Ensai ( email )

15 Boulevard Gabriel Peri
Malakoff Cedex, 1 92245
France

Aurélien Eyquem

Université de Rennes 1, CREM ( email )

7 Pl. Hoche
35065 Rennes Cedex

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
45
Abstract Views
410
PlumX Metrics