Register  |  Login  |  Inquiries  |  Sitemap |  
Advanced Search
Journal of Economic Integration 2013 September;28(3) :482-506.
DOI: https://doi.org/10.11130/jei.2013.28.3.482
Financial Heterogeneity in a Monetary Union

Cristina Badarau,  Grégory Levieuge 
Université Montesquieu Bordeaux IV, Pessac, France
Université d’Orléans, Orléans, France
Corresponding Author: Cristina Badarau ,Tel: +33 556848536, Fax: +33 556848534, Email: florina-cristina.badarau@u-bordeaux4.fr
Copyright ©2013 Journal of Economic Integration
ABSTRACT
This paper addresses the issue of macroeconomic policies in a financially heterogeneous monetary union. Optimized policy rules are used, under various budgetary policy scenarios, in a two-country DSGE model. The results indicate that a Euro-wide monetary policy strategy based on national information does not offset the costs associated with the abandonment of national monetary policy. Decentralized budgetary policies need to be more proactive in countries which are structurally more sensitive to shocks. For independent common monetary policy, cooperation between governments is comparable to a coalition, causing losses for every member. Welfare improvement at the union level only results from reducing public expenditure divergences.

JEL Classification
E44: Financial Markets and the Macroeconomy
E58: Central Banks and Their Policies
E63: Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
Keywords: DSGE model | Monetary Union | Financial Heterogeneity | Monetary and Budgetary rules | Cooperation
 
REFERENCE
1. Andersen, T. (2005). Fiscal Stabilization Policy in a Monetary Union with Inflation Targeting. Journal of Macroeconomics 27, 1-29.
2. Angelini, P., Del Giovane, P., Siviero, S. and Terlizzese, D. (2002). Monetary policy rules for the euro area: what role for national information?. Banca d’ Italia Temi di Discussione , No. 457
3. Angeloni, I., Kashyap, A., Mojon, B. (2003), Monetary policy transmission in the euro area: A Study by the Eurosystem Monetary Transmission Network, Cambridge University Press
4. Angeloni, I. and Ehrmann, M. (2007). Euro area inflation differentials. The B.E. Journal of Macroeconomics 7, 1, Art. 24.
5. Angeloni, I. and Ehrmann, M. (2003). Monetary policy transmission in the euro area: any changes after EMU?. ECB Working Paper Series No. 240.
6. Annicchiarico, B., Giammarioli, N. and Piergallini, A. (2006). Fiscal policy in a monetary economy with capital and finite lifetime. ECB Working Paper No 661.
7. Badarau, C. and Levieuge, G. (2011). Assessing the Effects of Financial Heterogeneity in a Monetary Union: A DSGE Approach. Economic Modelling 28, 6, 2451-2461.
8. Badarau-Semenescu, C., Gregoriadis, N. and Villieu, P. (2009). Monetary policy and inflation divergences in a heterogeneous monetary union. Journal of Economic Integration 24, 3, 408-434.
9. Badarau-Semenescu, C. and Levieuge, G. (2010). Assessing the potential strength of the Bank Capital Channel in Europe: A Principal Components Analysis. The Review of Finance and Banking 2, 1, 5-16.
10. Baele, L., Ferrando, A., Hordahl, P., Krylova, E. and Monnet, C. (2004). Measuring financial integration in the Euro area. ECB, Occasional Paper Series No. 14.
11. Ballabriga, F. and Martinez-Mongay, C. (2002), “Has EMU shifted policy?” European Commission Economic Papers, No. 166.
12. Benassy, J.-P. (2003). Fiscal policy and optimal monetary rules in a non-Ricardian economy. Review of Economic Dynamics 6, 3, 498-512.
13. Bernanke, B., Gertler, M. and Gilchrist, S. (1999). The financial accelerator in a quantitative business cycle framework, in: Taylor, J.B., Woodford, M. (Eds.), Handbook of Macroeconomics, 1, North-Holland.
14. Blum, J. and Hellwig, M. (1995). The Macroeconomic Implications of Capital Adequacy Requirements for Banks. European Economic Review 39, 739–749.
15. Brissimis, S.N. and Skotida, I. (2008).Optimal monetary policy in the euro area in the presence of heterogeneity. Journal of International Money and Finance, 27, 209-226
16. Calvo, G.A. (1983). Staggered prices in a utility-maximizing framework. Journal of Monetary Economics 12, 383-398.
17. Carlstrom, C.T. and Fuerst, T.S. (1997). Agency costs, net worth, and business fluctuations: A computable general equilibrium analysis. American Economic Review 87, 5, 893-910.
18. Chatelain, J-B., Ehrmann, M., Generale, A., Martinez-Pages, J., Vermeulen, P. and Worms, A. (2003). Monetary policy transmission in the euro area: new evidence from micro data on firms and banks. Journal of European Economic Association 1, 2-3, 731-742.
19. Chen, N.K. (2001). Bank net worth, asset prices and economic activity. Journal of Monetary Economics 48, 415-436.
20. Christensen, Y. and Dib, A. (2008). The financial accelerator in a estimated new-keynesian model. Review of Economic Dynamics 11, 1, 155-178.
21. De Grauwe, P. and Piskorski, T. (2001). Union-wide aggregates versus national data based monetary policies: Does it matter for EMU?, CEPR Discussion Paper No.3036
22. De Grauwe, P. and Senegas. A. (2006). Monetary policy design and transmission asymmetry in EMU: Does uncertainty matter ?. European Journal of Political Economy 22, 787-808
23. De Grauwe P., Senegas A. (2004). Monetary policy transmission asymmetries: some implications for EMU and its enlargement, Journal of Common Market Studies, 42(4), 757-773.
24. Dixit A. (2001). Games of monetary and fiscal interactions in the EMU, European Economic Review, 45(4-6), 589-613.
25. Dixit A., Lambertini L. (2003). Symbiosis of monetary and fiscal policies in a monetary union, Journal of International Economics, 60(2), 235-247
26. ECB (2008). ECB Monthly Bulletin, March 2008.
27. Ehrmann, M., Gambacorta, L., Martinez-Pages, J., Sevestre, P. and Worms, A. (2003). Financial systems and the role of banks in monetary policy transmission in the euro area, in Angeloni, I., Kashyap, A., Mojon,B. (Eds.), Monetary policy transmission in the euro area: A Study by the Eurosystem Monetary Transmission Network, Cambridge University Press, 235-269.
28. Ekinci, M. F., Kalemi-Ozcan, S. and Sorensen, B. (2007). Financial integration within the EU countries: The role of institutions, confidence and trust. NBER Working Paper No. 13440.
29. Fagan, G., Henry, J. and Mestre, R. (2001). An Area-Wide Model (AWM) for the Euro Area. ECB Working Paper No. 42
30. Faia, E. (2002). Monetary Policy in a world with different financial systems. EBC Working Paper 183.
31. Ferrero, A. (2009). Fiscal and Monetary Rules for a Currency Union. Journal of International Economics, 77, 1, 1-10.
32. Fourçans, A. and Vranceanu, R. (2007). The ECB monetary policy: Choices and challenges. Journal of Policy Modeling, 29, 181-194.
33. Gali, J. and Monacelli, T. (2008). Optimal monetary and fiscal policy in a currency union.Journal of International Economics, 76, 116-132.
34. Gerali, A., Neri, S., Sessa, L. and Signoretti, F.M. (2010). Credit and Banking in a DSGE Model of the Euro Area. Journal of Money, Credit and Banking 42, s1, 107-141
35. Gertler, M. and Kiyotaki, N. (2010). Financial Intermediation and Credit Policy in Business Cycle Analysis, in
36. Friedman, B.M., Woodford, M. (Eds.), Handbook of Monetary Economics, Elsevier, Edition 1, Vol. 3, No. 3.
37. Gilchrist, S., Hairault, J-O. and Kempf, H. (2002). Monetary policy and the financial accelerator in a monetary union. ECB Working Paper No.175.
38. Gomes, J. F., Yaron, A. and Zhang, L. (2003). Asset prices and business cycles with costly external finance, Review of Economic Dynamics 6, 4, 767-788.
39. Grimm, O. and Ried, S. (2007). Macroeconomic policy in a heterogeneous Monetary Union. SFB 649 Discussion Paper 2007-028
40. Gros, D. and Hefeker, C. (2002). One size must fit all: National divergences in a Monetary Union. German Economy Review, 3 (3), 1-16
41. von Hagen J. and Mundschenk, S. (2003). Fiscal and monetary policy coordination in EMU, International Journal of Finance and Economics, Special Issue: Monetary Union and Dollarization, 8(4), 279–295.
42. Hayo, B. and Hefeker, C. (2008). Does Central Bank Independence Cause Low Inflation: A Skeptical View. Paolo Baffi Centre Research Paper 2008-04.
43. Hofmann, B. and Remsperger, H. (2005). Inflation differentials among the Euro area countries: Potential causes and consequences. Journal of Asian Economics 16, 403-419.
44. Jondeau, E. and Sahuc, J.G. (2008). Testing heterogeneity within the Euro Area. Economics Letters 99, 192– 196
45. Kiyotaki, N. and Moore, J. (1997). Credit cycles. Journal of Political Economy 105, 2, 211-248
46. Lambertini L, Levine, P. and J. Pearlman (2007). Fiscal policy in a monetary union: can fiscal cooperation be counterproductive?, University of Surrey, Discussion Paper n. 1707.
47. Lane, P.R. (2006). The real Effects of the Euro. Journal of Economic Perspectives 20, 4, 47-66.
48. Leitemo, K. (2004). A game between the fiscal and the monetary authorities under inflation targeting. European Journal of Political Economy 20, 709-724.
49. Levieuge, G. (2009). The Bank Capital Channel and Counter-Cyclical Prudential Regulation in a DSGE model. Louvain Economic Review 75, 4, 420-465.
50. Licheron, J. (2009). Politique monétaire de la BCE et inertie des taux d’intérêt. Quel rôle pour les indicateurs d’inflation nationaux. Revue Economique 60, 3, 713-725.
51. MacDonald, R. and Wojcik, C. (2008). Catching-up and inflation differentials in a heterogeneous monetary union: some implications for the euro area and the new EU Member States. Economic Systems 32, 1, 4-16.
52. Muscatelli, V.A., Tirelli, P. and Trecroci, C. (2004). Fiscal and Monetary Policy Interactions: Empirical Evidence and Optimal Policy using a Structural New-Keynesian Model. Journal of Macroeconomics 26, 257-280.
53. Rogoff, K. (1985a). Can international monetary policy cooperation be counterproductive?, Journal of International Economics, 18(3-4), 199-217.
54. Sauer S. and Sturm, J-E. (2007). Using Taylor Rules to Understand European Central Bank Monetary Policy. German Economic Review 8, 3, 375-398.
55. Sekkat, Kh. and Malek Mansour, J. (2005). Exchange rate fluctuations, trade and asymmetric shocks in the Economic and Monetary Union. International Finance 8, 1, 119-137.
56. Sunirand, P. (2003). The role of bank capital and the transmission mechanism of monetary policy. Financial Markets Group Discussion Papers No. 433.
57. Treaty on the European Union and Treaty on the functioning of the European Union (Consolidated version), 6655/1/08 REV1, European Union Council, Bruxelles, 30 avril 2008.
58. Van Aarle, B., Garretsen, H. and Huart, F. (2004). Monetary and fiscal policy rules in the EMU. German Economic Review, 5(4), 407-434
59. Van Aarle , B., Engwerda, J. and Plasmans, J. (2002). Monetary and fiscal policy interaction in the EMU: A Dynamic Game Approach. Annals of Operations Research 109, 229-264.
60. Vogel, L., Roeger, W. and Herz, B. (2006). Optimal simple rules for fiscal policy in a monetary Union. Bayreuth University Discussion Paper No. 21.
61. Villieu, P. (2008). Quelle gouvernance pour une Union monétaire asymétrique ? Un modèle simple. Brussels Economic Review 51, 1, 57-78.
62. Woodford, M. (2003). Interest and Prices, Foundations of a theory of Monetary Policy. Princeton University Press.
TOOLS
PDF Links  PDF Links
Full text via DOI  Full text via DOI
Download Citation  Download Citation
  Print
Share:      
METRICS
4
Crossref
0
Scopus
7,536
View
54
Download
Tax Competition, Fiscal Policy, and Public Debt Levels in a Monetary Union  2020 September;35(3)
Labor Heterogeneity and Trade Liberalization  2006 March;21(1)
Financial Market Dynamics in an Enlarged European Union  2009 June;24(2)
Nominal Wage Flexibility and Monetary Union  2004 March;19(1)
Transparency and Catching Up in a Monetary Union  2009 March;24(1)
Editorial Office
Center for Economic Integration, Sejong University, 209, Neungdong-Ro, Gwangjin-Gu,
Seoul, 05006, Korea
TEL : +82-2-3408-3338    FAX : +82-2-6935-2492   E-mail : editorial.office@e-jei.org
Browse Articles |  Current Issue |  For Authors and Reviewers |  About
Copyright© by Center for Economic Integration.      Developed in M2PI