Working Paper: CEPR ID: DP8068
Authors: Bernardino Ado; Isabel Correia
Abstract: It is believed that a shock, common to a set of countries with identical fundamentals, has identical outcomes across countries. We show that in general, when specialization in production is such that a common shock creates a missing role for labor mobility across countries, the terms of trade of any country reacts to the shock. This is the case even if state contingent assets can be traded across countries. The transmission mechanism of a monetary shock in a monetary union has in this case an additional channel, the terms of trade. We also show that the country outcomes are significantly different, when compared with the effect of the shock on the union's aggregate. Monetary shocks impose cycles with higher volatility in
Keywords: idiosyncratic effects; labor immobility; monetary union; transmission mechanisms
JEL Codes: E31; E41; E58; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| common shocks (E32) | asymmetric outcomes (C72) |
| terms of trade (F14) | different economic responses (P19) |
| monetary shocks (E39) | cycles (E32) |
| country's wealth (D31) | response to monetary shocks (E39) |
| monetary shocks (E39) | volatility of cycles (E32) |