Monetary Policy and the Financial Accelerator in a Monetary Union

43 Pages Posted: 28 May 2003

See all articles by Simon Gilchrist

Simon Gilchrist

Boston University - Department of Economics; National Bureau of Economic Research (NBER)

Jean-Olivier Hairault

Université Paris I Pantheon-Sorbonne; IZA Institute of Labor Economics

Hubert Kempf

Ecole Normale Superieure de Cachan (ENS)

Date Written: September 2002

Abstract

In this paper, we consider the effect of a monetary union in a model with a significant role for financial market imperfections. We do so by introducing a financial accelerator into a stochastic general equilibrium macro model of a two country economy. We show that financial market imperfections introduce important cross-country transmission mechanisms to asymmetric shocks to supply and demand. Within this framework, we study the likely costs and benefits of monetary union. We also consider the effects of cross-country heterogeneity in financial markets. Both the presence of financial frictions and the use of a single currency have significant impacts on the international propagation of exogenous shocks. The introduction of asymmetries in the financial contract widens the differences in cyclical behavior of national economies in a monetary union, but financial integration compensates the loss of policy instruments.

Keywords: Financial Accelerator, Exchange Rate Policy, monetary economics, monetary policy and international economics

Suggested Citation

Gilchrist, Simon and Hairault, Jean-Olivier and Kempf, Hubert, Monetary Policy and the Financial Accelerator in a Monetary Union (September 2002). ECB Working Paper No. 175; FRB International Finance Discussion Paper No. 750. Available at SSRN: https://ssrn.com/abstract=358120

Simon Gilchrist (Contact Author)

Boston University - Department of Economics ( email )

270 Bay State Road
Boston, MA 02215
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jean-Olivier Hairault

Université Paris I Pantheon-Sorbonne ( email )

12, place du Panthéon
Paris, IL
France

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Hubert Kempf

Ecole Normale Superieure de Cachan (ENS) ( email )

61 avenue du président Wilson
Cachan, Paris 94235
France

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