Real and Nominal Divergences in a Monetary Union - An Approach beyond the Theory of Optimum Currency Areas

Abstract

This paper is intended to theoretically present divergent business cycles as effects of a monetary union, even in the absence of asymmetric, exogenous shocks. The main inference form the model developed in this paper says that microeconomic optimization may lead to sub-optimal macro states and sustainable macroeconomic equilibrium is possible only for a country specific equilibrium interest rate. The model offers an explanation of macroeconomic fluctuations in a monetary union and, in particular, the nominal and real divergences we have been observing in the EMU. More generally, it may be considered as a theoretical argument for the costs of a fixed rate or a common currency, quite separate from the existing theory of the optimum currency area.

Keywords: monetary union, business cycle

JEL Classification: F33, E32, E52, F41, F31