The Effect of Openness in a Small Open Monetary Union

34 Pages Posted: 10 Feb 2011

See all articles by Seppo Orjasniemi

Seppo Orjasniemi

Bank of Finland, Monetary Policy and Research Department

Date Written: December 15, 2010

Abstract

In this paper we build a dynamic stochastic general equilibrium model of a small open monetary union with optimal monetary and fiscal policy, to study the transmission of country specific shocks and associated exchange rate fluctuations. We show that movements of the monetary union’s exchange rate stabilize the output fluctuations inside the monetary union, reducing the need for fiscal stabilization. We also show that, under the optimal policy, fluctuations in the exchange rate and the union-wide aggregates are affected by the differences in the degree of nominal rigidities among the monetary union member countries.

Keywords: monetary union, monetary policy, fiscal policy, exchange rate

JEL Classification: E52, E62, F41

Suggested Citation

Orjasniemi, Seppo, The Effect of Openness in a Small Open Monetary Union (December 15, 2010). Bank of Finland Research Discussion Paper No. 18/2010, Available at SSRN: https://ssrn.com/abstract=1755111 or http://dx.doi.org/10.2139/ssrn.1755111

Seppo Orjasniemi (Contact Author)

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

PO Box 160
00101 Helsinki
Finland

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