Working Paper: CEPR ID: DP5615
Authors: Vo Phuong Mai Le; Patrick Minford
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: Asymmetry; Monetary Union; Multicountry Model; Representative Agent Model; Wage Rigidity
JEL Codes: E42; F41; F42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| symmetry in member states (F55) | welfare outcomes of monetary union (F36) |
| asymmetry (D51) | welfare losses (D69) |
| differing wage rigidities (J31) | asymmetry (D51) |
| union's monetary policy inadequately addresses asymmetric shocks (F45) | welfare losses (D69) |
| union's active monetary policy pursues distinct objectives (E63) | welfare losses (D69) |