Welfare Reversals in a Monetary Union

GATE Working Paper Series No. 1342

46 Pages Posted: 8 Jan 2014

See all articles by Stéphane Auray

Stéphane Auray

CREST-Ensai

Aurélien Eyquem

University of Lyon 2 - Groupe d'Analyse et de Théorie Economique (GATE)

Date Written: November 2013

Abstract

We show that welfare can be lower under complete financial markets than under autarky in a monetary union with home bias, sticky prices and asymmetric shocks. Such a monetary union is a second-best environment in which the structure of financial markets affects risk-sharing but also shapes the dynamics of inflation rates and the welfare costs from nominal rigidities. Welfare reversals arise for a variety of empirically plausible degrees of price stickiness when the Marshall-Lerner condition is met. These results carry over a model with active fiscal policies, and hold within a medium-scale model, although to a weaker extent.

Keywords: Monetary Union, Financial Markets Incompleteness, Sticky Prices, Fiscal and Monetary Policy

JEL Classification: E32, E63, F32, F41, F42

Suggested Citation

Auray, Stéphane and Eyquem, Aurélien, Welfare Reversals in a Monetary Union (November 2013). GATE Working Paper Series No. 1342. Available at SSRN: https://ssrn.com/abstract=2376158 or http://dx.doi.org/10.2139/ssrn.2376158

Stéphane Auray

CREST-Ensai ( email )

15 Boulevard Gabriel Peri
Malakoff Cedex, 1 92245
France

Aurélien Eyquem (Contact Author)

University of Lyon 2 - Groupe d'Analyse et de Théorie Economique (GATE) ( email )

93, chemin des Mouilles
Ecully, 69130
France

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