Welfare Reversals in a Monetary Union
- (pp. 246-90)
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.Citation
Auray, Stéphane, and Aurélien Eyquem. 2014. "Welfare Reversals in a Monetary Union." American Economic Journal: Macroeconomics, 6 (4): 246-90. DOI: 10.1257/mac.6.4.246Additional Materials
JEL Classification
- E31 Price Level; Inflation; Deflation
- E52 Monetary Policy
- E62 Fiscal Policy
- F33 International Monetary Arrangements and Institutions
- F41 Open Economy Macroeconomics
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