scholarly journals Welfare Reversals in a Monetary Union

2014 ◽  
Vol 6 (4) ◽  
pp. 246-290 ◽  
Author(s):  
Stéphane Auray ◽  
Aurélien Eyquem
Keyword(s):  
Financial Markets ◽  
Monetary Union ◽  
Risk Sharing ◽  
Home Bias ◽  
Scale Model ◽  
Fiscal Policies ◽  
Medium Scale ◽  
Asymmetric Shocks ◽  
Inflation Rates ◽  
Carry Over

We show that welfare can be lower under complete financial markets than under autarky in a monetary union with home bias, sticky prices, and asymmetric shocks. Such a monetary union is a second-best environment in which the structure of financial markets affects risk-sharing but also shapes the dynamics of inflation rates and the welfare costs from nominal rigidities. Welfare reversals arise for a variety of empirically plausible degrees of price stickiness when the Marshall-Lerner condition is met. These results carry over a model with active fiscal policies, and hold within a medium-scale model, although to a weaker extent. (JEL E31, E52, E62, F33, F41)

scholarly journals From home bias to Euro bias: Disentangling the effects of monetary union on the European financial markets

2010 ◽  
Vol 62 (5) ◽  
pp. 347-366 ◽  
Author(s):  
Faruk Balli ◽  
Syed Abul Basher ◽  
Hatice Ozer-Balli
Keyword(s):  
Financial Markets ◽  
Monetary Union ◽  
Home Bias

scholarly journals Specificity of Fiscal Policy in the Monetary Union

2018 ◽  
Vol 16 (28) ◽  
Author(s):  
Branka Topić-Pavković
Keyword(s):  
Fiscal Policy ◽  
Monetary Union ◽  
Cost Benefit Analysis ◽  
Cost Benefit ◽  
Monetary Integration ◽  
Fiscal Policies ◽  
Convergence Criteria ◽  
Asymmetric Shocks ◽  
Market Instability ◽  
The Cost

The condition of the optimal currency area as a theoretical basis of the monetary integration considers the harmonization of the fiscal and monetary policy crucial in achieving the efficient functioning of the monetary union. The issue of sustainability of the monetary union without fiscal union reaches real intensity in times of crisis and market instability. In that context, this paper focuses on the relation of uncoordinated fiscal policies and non-fulfillment of the fiscal criteria of convergence with the functioning and sustainability of the monetary union. The aim of this research is to establish whether, based on the analysed theoretical assumptions and empirical case, the fiscal criteria are respected in practice in the member countries, and how specificity of the fiscal policy influences the monetary integration especially in the years of crisis. We started research with the cost-benefit analysis of the monetary union pointing out to the specific costs and benefits occurring when a country joins the monetary union. We examined the fiscal parameters of the convergence criteria of the member states pointing to the problem of heterogeneity of members and deviations from the reference values of the Union. The results show that the metodology used to establish the set norms of the fiscal convergence cannot cor-respond symetrically to all member countries. The results also point to thefact that, unlike symmetrical, in the emergence of asymmetric shocks, i.e.disorders that affect various countries differently, membership in the monetaryunion becomes more expensive because of the inability to conductmonetary policy.

Getting the Core: A Neo‐institutionalist Approach to the EMU

1995 ◽  
Vol 30 (3) ◽  
pp. 347-369 ◽  
Author(s):  
Miriam L. Campanella
Keyword(s):  
Financial Markets ◽  
Monetary Union ◽  
Trade Agreement ◽  
Maastricht Treaty ◽  
Convergence Criteria ◽  
The North ◽  
Single European Act ◽  
Effective Role ◽  
Set Up ◽  
New Institutions

THE NEW REGIONALISM, MANIFESTED IN EUROPE BY THE SINGLE European Act and the Maastricht Treaty (1992) and in North America by the signature of the North-American Free Trade Agreement (NAFTA 1993), is centred on strategic policies and new institutions, the aims of which are to achieve a more effective role in global competition. In Europe, the shift is marked by the impending process of monetary union and the creation of its related institutions. The new approach agreed in the Maastricht Treaty sets out four requirements for eligibility to membership of monetary union. Convergence criteria embodying the judgment of financial markets about future inflation, exchange rate and fiscal policy appeared to be the second best choice for governments seeking to institutionalize their commitment to inflation-avoiding policies. The whole mechanism is meant first to provide the region with a credible monetary institution able to win over the financial markets and secondly to set up bulwarks to the inflation-prone pressures of domestic sheltered interests. Thirdly, the aim is to commit member countries, through a so-called targeting exercise (in Keohane's words) to accomplishing the agreed objectives with monetary discipline and macroeconomic adjustment.

scholarly journals International Liquidity and Exchange Rate Dynamics *

2015 ◽  
Vol 130 (3) ◽  
pp. 1369-1420 ◽  
Author(s):  
Xavier Gabaix ◽  
Matteo Maggiori
Keyword(s):  
Exchange Rate ◽  
Financial Markets ◽  
Exchange Rates ◽  
Capital Flows ◽  
Risk Sharing ◽  
Market Model ◽  
International Liquidity ◽  
Balance Sheets ◽  
Macroeconomic Analysis ◽  
International Pricing

Abstract We provide a theory of the determination of exchange rates based on capital flows in imperfect financial markets. Capital flows drive exchange rates by altering the balance sheets of financiers that bear the risks resulting from international imbalances in the demand for financial assets. Such alterations to their balance sheets cause financiers to change their required compensation for holding currency risk, thus affecting both the level and volatility of exchange rates. Our theory of exchange rate determination in imperfect financial markets not only helps rationalize the empirical disconnect between exchange rates and traditional macroeconomic fundamentals, it also has real consequences for output and risk sharing. Exchange rates are sensitive to imbalances in financial markets and seldom perform the shock absorption role that is central to traditional theoretical macroeconomic analysis. Our framework is flexible; it accommodates a number of important modeling features within an imperfect financial market model, such as nontradables, production, money, sticky prices or wages, various forms of international pricing-to-market, and unemployment.

scholarly journals Banks, Financial Markets and International Consumption Risk Sharing

2012 ◽  
Vol 13 (3) ◽  
pp. 331-351 ◽  
Author(s):  
Markus Leibrecht ◽  
Johann Scharler
Keyword(s):  
Financial Markets ◽  
Risk Sharing ◽  
Banking Sector ◽  
Financial System ◽  
International Diversification ◽  
Oecd Countries ◽  
Idiosyncratic Risk ◽  
Per Se ◽  
Consumption Risk

Abstract In this article, we explore how characteristics of the domestic financial system influence the international allocation of consumption risk in a sample of OECD countries. Our results show that the extent of risk sharing achieved does not depend on the overall development of the domestic financial system per se. Rather, it depends on how the financial system is organized. Countries characterized by developed financial markets are less exposed to idiosyncratic risk, whereas the development of the banking sector contributes little to the international diversification of consumption risk.

Monetary Integration, Fiscal Divergence and Current Account Imbalances in Europe

2018 ◽  
Vol 15 (1) ◽  
Author(s):  
Gunther Schnabl
Keyword(s):  
Fiscal Policy ◽  
Monetary Union ◽  
Current Account ◽  
European Monetary Union ◽  
Exchange Rate Regime ◽  
Early Years ◽  
Monetary Integration ◽  
Fiscal Policies ◽  
European Monetary ◽  
Panel Regressions

Abstract The paper scrutinizes the role of diverging fiscal policy stances for diverging current account positions in Europe with a focus on the European Monetary Union (EMU). In a heterogeneous monetary union fiscal policy has the task to absorb asymmetric shocks to ensure the efficacy of the one-size monetary policy. It is argued that since the early years of the European Monetary Union divergent fiscal policies combined with monetary expansion constituted a major determinant of current account divergence within the euro area, which finally led into the European debt and financial crisis. Panel regressions reveal a significant impact of fiscal policies on current account positions, which to a large extent are independent from the exchange rate regime and turn out to be contingent on monetary and fiscal policy mix. Based on the findings economic policy recommendations are presented.

Sign in / Sign up

Export Citation Format

Share Document