Working Paper: CEPR ID: DP18258
Authors: Christian Bayer; Alexander Kriwoluzky; Gernot Müller; Fabian Seyrich
Abstract: How does a monetary union alter the impact of business cycle shocks at the household level? We develop a Heterogeneous Agent New Keynesian model of two countries (HANK²) and show in closed form that a monetary union shifts the adjustment to a shock horizontally - across countries - within the brackets of the union-wide wealth distribution rather than vertically - that is, across the brackets of the union-wide wealth distribution. Calibrating the model to the euro area reveals that a monetary union alters the impact of shocks most strongly in the tails of the wealth distribution but leaves the middle class almost unaffected.
Keywords: two-country model; HANK2; monetary union; spillovers; monetary policy; heterogeneity; inequality; households
JEL Codes: F45; E52; D31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Monetary unions (F45) | No change in union-wide dynamics following country-specific shocks (F69) |
| Monetary unions (F45) | Aggregate responses of output, consumption, and inflation independent of monetary policies (E19) |
| Monetary unions (F45) | No vertical redistribution of shock impacts across wealth classes (D39) |
| Monetary unions (F45) | Horizontal redistribution of impacts across countries (F69) |
| Shocks (E32) | Affect households in tails of wealth distribution (G59) |
| Monetary unions (F45) | Shocks impact households, considering household-level heterogeneity (D19) |
| Monetary unions (F45) | Welfare impacts of shocks concentrated in tails of wealth distribution (D39) |
| Country-specific shocks (F69) | Varying effects on different wealth classes (E21) |