Template-Type: ReDIF-Paper 1.0
Author-Name: Chiara Forlati 
Author-X-Name-First: Chiara
Author-X-Name-Last: Forlati
Author-Email: chiara.forlati@epfl.ch
Author-Workplace-Name: Chair of International Finance, Ecole Polytechnique Federale de Lausanne (EPFL), Switzerland
Title: On the Benefits of a Monetary Union: does it pay to be bigger?
Abstract: A two area dynamic stochastic general equilibrium model is employed to investigate the welfare implications of losing monetary independence. Two policy regimes are compared: (i) in one area there is a common currency, while in the other area countries still retain their autonomous monetary policy; (ii) there are two monetary unions. When chosen by national authorities, monetary policy can stabilize optimally the effects of country-specific shocks. However, in that case, policy decisions internalize neither the spillover effects on consumers living in the same area nor their impact on the world economy. Thus the adoption of a common currency implies a trade-off between the cost of not tailoring monetary policy to single country economic conditions and the gains entailed by the improvement upon the conduct of national monetary policies. Our results show that under markup shocks and plausible calibrations, there may be welfare gains from adopting a common currency.
Length: 53 pages		
Creation-Date: 2007-10
Revision-Date: 2009-05
Publication-Status: 
File-URL: http://infoscience.epfl.ch/record/141376/files/CFP2009_03_1.pdf
Number:
Classification-JEL: E52, E61, F4
Keywords: Optimal Monetary Policy, Currency Areas, Terms of Trade Externality
Handle: RePEc:cif:wpaper:200903