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Stability of business cycles and economic openness of monetary union

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  • Masato Nakao

    (Chiba University of Commerce)

Abstract

In this study, we focus on the relationship between the stability of business cycle and the criteria for an optimum currency area. We do so by investigating the effect of satisfying the criterion of the degree of economic openness on the stability of the business cycle, using a Kaldorian two-country model with a monetary union and imperfect capital mobility. We find that an increase in capital mobility is a destabilizing factor, whereas an increase in the degree of openness of an economy and a counter-cyclical fiscal policy are stabilizing factors. Furthermore, we obtain the result that a high degree of economic openness can adjust a shock in the monetary union regardless of whether the shock is asymmetric. The criterion of degree of economic openness serves as one of the criteria for optimum currency area, even if an asymmetric shock tends to occur by regional concentration of industry due to high degree of openness of the economy.

Suggested Citation

  • Masato Nakao, 2019. "Stability of business cycles and economic openness of monetary union," Evolutionary and Institutional Economics Review, Springer, vol. 16(1), pages 65-89, June.
    • Handle: RePEc:spr:eaiere:v:16:y:2019:i:1:d:10.1007_s40844-019-00124-6
    DOI: 10.1007/s40844-019-00124-6
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    References listed on IDEAS

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    1. De Grauwe, Paul & Ji, Yuemei, 2016. "Flexibility versus stability. A difficult trade-off in the Eurozone," CEPR Discussion Papers 11372, C.E.P.R. Discussion Papers.
    2. De Grauwe, Paul, 2016. "Economics of Monetary Union," OUP Catalogue, Oxford University Press, edition 11, number 9780198739876.
    3. Mongelli, Francesco Paolo, 2002. "ìNew" Views on the Optimum Currency Area Theory: What is EMU Telling US?," Royal Economic Society Annual Conference 2002 140, Royal Economic Society.
    4. Martin Gächter & Aleksandra Riedl & Doris Ritzberger-Grünwald, 2012. "Business Cycle Synchronization in the Euro Area and the Impact of the Financial Crisis," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 2, pages 33-60.
    5. Andrew K. Rose, 2000. "One money, one market: the effect of common currencies on trade," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 15(30), pages 08-45.
    6. Murakami, Hiroki & Asada, Toichiro, 2018. "Inflation-deflation expectations and economic stability in a Kaleckian system," Journal of Economic Dynamics and Control, Elsevier, vol. 92(C), pages 183-201.
    7. George Tavlas, 1994. "The theory of monetary integration," Open Economies Review, Springer, vol. 5(2), pages 211-230, March.
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    Cited by:

    1. Masato Nakao & Toichiro Asada, 2022. "Purchase of government bonds by a supranational central bank: its impact on business cycles," Evolutionary and Institutional Economics Review, Springer, vol. 19(1), pages 395-424, April.

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    More about this item

    Keywords

    Optimum currency area; Economic openness; Kaldorian two-country model; Business cycle stability; Euro area;
    All these keywords.

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F15 - International Economics - - Trade - - - Economic Integration
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions

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