Welfare Reversals in a Monetary Union

Stéphane Auray (1, 2) , Aurélien Eyquem (3)

1 EQUIPPE - Economie Quantitative, Intégration, Politiques Publiques et Econométrie
2 CREST - Centre de Recherche en Économie et Statistique
3 GATE Lyon Saint-Étienne - Groupe d'Analyse et de Théorie Economique Lyon - Saint-Etienne

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.

Mots clés: Monetary Union; Financial Markets Incompleteness; Sticky Prices; Fiscal and Monetary Policy

Domaines: Economies et finances

Stéphane Auray, Aurélien Eyquem. Welfare Reversals in a Monetary Union. 2014. ⟨halshs-00925589⟩