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The 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 The 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
 
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