Research Discussion Papers, Bank of Finland
The effect of openness in a small open monetary union
Abstract: In this paper we build a dynamic stochastic general
equilibrium model of a small open monetary union with optimal monetary and
fiscal policy, to study the transmission of country specific shocks and
associated exchange rate fluctuations. We show that movements of the
monetary union’s exchange rate stabilize the output fluctuations inside the
monetary union, reducing the need for fiscal stabilization. We also show
that, under the optimal policy, fluctuations in the exchange rate and the
union-wide aggregates are affected by the differences in the degree of
nominal rigidities among the monetary union member countries.
Keywords: monetary union; monetary policy; fiscal policy; exchange rate; (follow links to similar papers)
JEL-Codes: E52; E62; F41; (follow links to similar papers)
31 pages, December 2, 2010
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