The Dynamic Effects of Country Specific Shocks in a Monetary Union

Univ. of Oulu, Dept. of Economics Working Paper No. 0902

20 Pages Posted: 3 Mar 2010

See all articles by Seppo Orjasniemi

Seppo Orjasniemi

Bank of Finland, Monetary Policy and Research Department

Date Written: April 1, 2009

Abstract

This paper uses a dynamic stochastic general equilibrium model with three countries to study the effects of implementation of an open monetary union on international fluctuations. We consider the effects of unanticipated country specific shocks on technology and government spending. We compare the resulting fluctuations to a benchmark case with three independent currencies. We find that the implementation of monetary union reverses the expenditure switching effects between the goods produced inside the monetary union and that the implementation of monetary union stabilizes the fluctuations caused by shocks emerging inside the monetary union. We also find that countries benefit more from positive technology shocks when they are members of a monetary union and that in the monetary union the negative spillovers resulting from fiscal expansion by one member country are rather small.

Keywords: Monetary union, government spending, terms of trade

JEL Classification: F33, F41

Suggested Citation

Orjasniemi, Seppo, The Dynamic Effects of Country Specific Shocks in a Monetary Union (April 1, 2009). Univ. of Oulu, Dept. of Economics Working Paper No. 0902, Available at SSRN: https://ssrn.com/abstract=1562570 or http://dx.doi.org/10.2139/ssrn.1562570

Seppo Orjasniemi (Contact Author)

Bank of Finland, Monetary Policy and Research Department ( email )

PO Box 160
00101 Helsinki
Finland

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