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Journal of Economic Integration 2005 December;20(4) :746-770.
DOI: https://doi.org/10.11130/jei.2005.20.4.746
Endogenously Asymmetric Demand Shocks in a Monetary Union
Olivier Loisel 
CREST-LMA, Paris, France
Copyright ©2005 Journal of Economic Integration
ABSTRACT

This paper presents a two-country two-industry monetary model, with intermediate inputs and transport costs, which builds a bridge between the New Open Economy Macroeconomics and the New Economic Geography literatures. Endogenously asymmetric shocks arise in this model when the exchange rate regime in force fosters the concentration of each industry in one country, thus turning industry-specific shocks into country-specific shocks. Because of the conjunction of substitution and/or income effects, endogenously asymmetric demand shocks are found more likely to arise in a monetary union than under a flexible exchange rate regime.

JEL Classifications: F12, F15, F33, F41, R12, R13

Keywords: Asymmetric shocks | Endogenous specialization | Optimum currency area
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