Joining the European Monetary Union - Comparing First and Second Generation Open Economy Models

14 Pages Posted: 5 Jul 2006

See all articles by Vo Phuong Mai Le

Vo Phuong Mai Le

Cardiff University - Cardiff Business School

Patrick Minford

Cardiff University Business School; Centre for Economic Policy Research (CEPR)

Date Written: April 2006

Abstract

We log-linearise the Dellas and Tavlas (DT) model of monetary union and solve it analytically. We find that the intuition of optimal currency analysis of DT's second generation open economy model is essentially the same as that of first generation models. Monetary union results in no welfare loss if its member states are symmetric. However, asymmetry causes loss in welfare both due to the failure of the union policy to deal suitably with a country's asymmetric shocks and due to an active monetary policy by union in pursuit of its distinct objectives. The asymmetry in DT is largely due to the differing wage rigidities across countries.

Keywords: Monetary union, representative agent model, multi-country model, wage rigidity, asymmetry

JEL Classification: E42, F41, F42

Suggested Citation

Le, Vo Phuong Mai and Minford, Patrick, Joining the European Monetary Union - Comparing First and Second Generation Open Economy Models (April 2006). CEPR Discussion Paper No. 5615, Available at SSRN: https://ssrn.com/abstract=913349

Vo Phuong Mai Le

Cardiff University - Cardiff Business School ( email )

Aberconway Building
Colum Drive
Cardiff, CF10 3EU
United Kingdom

Patrick Minford (Contact Author)

Cardiff University Business School ( email )

Aberconway Building
Colum Drive
Cardiff, CF10 3EU
United Kingdom
+44 29 2087 5728 (Phone)
+44 29 2087 4419 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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