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The mechanics of a monetary union with segmented financial markets

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  • Alves, Nuno

Abstract

In this paper we characterize the transmission mechanism in a monetary union with segmented financial markets. We conclude that the impact of a monetary policy shock on the aggregate variables of the union depends on the degree of financial market segmentation. We also find that a monetary injection yields heterogeneous allocations across countries. In particular, a temporary monetary policy shock leads to permanent trade balance and current account effects. Further, the consumption correlation between countries is smaller than the output correlation. The degree of financial market segmentation and the endogenous distribution of liquidity in the monetary union are key to understanding this equilibrium.

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  • Alves, Nuno, 2008. "The mechanics of a monetary union with segmented financial markets," Journal of Macroeconomics, Elsevier, vol. 30(1), pages 346-368, March.
    • Handle: RePEc:eee:jmacro:v:30:y:2008:i:1:p:346-368
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    Cited by:

    1. Grégory LEVIEUGE & Cristina BADARAU-SEMENESCU, 2010. "Which policy-mix to mitigate the effects of the financial heterogeneity in a monetary union?," EcoMod2010 259600105, EcoMod.
    2. Agénor, Pierre-Richard & Aizenman, Joshua, 2011. "Capital market imperfections and the theory of optimum currency areas," Journal of International Money and Finance, Elsevier, vol. 30(8), pages 1659-1675.
    3. Christina Badarau & Grégory Levieuge, 2011. "Which policy-mix to mitigate the effects of financial heterogeneity in a monetary union?," Larefi Working Papers 201109, Larefi, Université Bordeaux 4.

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