Working Paper: CEPR ID: DP2068
Authors: Andrew J. Hughes Hallett; Laura Piscitelli
Abstract: The theory of optimal currency areas states that a single currency zone should have symmetry of shocks and structures across regions. Research on monetary union in Europe has either assumed these conditions to hold close enough not to cause problems, or has focussed on asymmetries in shocks. But what if economic structures and/or market responses differ between countries or regions? This paper examines the consequences of a single monetary policy when there are asymmetries in a) the monetary transmissions; b) the wage/price transmissions; and c) private sector asset holdings. We find the first and last destabilise the business cycle, and put countries out of phase with one another in a way that cannot be corrected by deficit constrained fiscal policies. The effect is to delay convergence.
Keywords: transmission mechanisms; coordination; monetary policy; asymmetries
JEL Codes: E52; E61; F42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| differences in monetary transmission and asset effects (E44) | destabilization of the natural European-wide business cycle (F44) |
| transmission mechanisms (F42) | economic stability (E63) |
| wage-price transmission asymmetries (F16) | deviations from a common economic path (F69) |