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Macroeconomic adjustment to monetary union

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  • Fagan, Gabriel
  • Gaspar, Ví­tor

Abstract

The move to monetary union in Europe led to convergence of interest rates among the participating countries. This was associated with notable cross-country differences in the behaviour of key macroeconomic aggregates. Compared to the low interest rate countries, former high interest rate countries experienced a boom in domestic demand, a deterioration of the current account and appreciation of the real exchange rate. This paper documents the key stylised facts of this experience and provides a compact two-country model, based on the Blanchard-Yaari setup, to analyze this phenomenon. This model, though simple, is able to broadly capture the main qualitative features of the adjustment. Using this model, we show that the creation of the monetary union leads to an increase in welfare for all generations in both country groups. JEL Classification: F36, E21, F32

Suggested Citation

  • Fagan, Gabriel & Gaspar, Ví­tor, 2008. "Macroeconomic adjustment to monetary union," Working Paper Series 946, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:2008946
    Note: 123709
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Susanu, Monica, 2009. "Convergence to EMU through the Test of the Public Finance –Romania’s Budgetary Deficit and Public Debt," MPRA Paper 20480, University Library of Munich, Germany.
    2. repec:grz:wpaper:2014-01 is not listed on IDEAS
    3. Karl Farmer, 2014. "Financial Integration and EMU’s External Imbalances in a Two-Country OLG Model," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 20(1), pages 1-21, February.
    4. repec:grz:wpaper:2016-05 is not listed on IDEAS
    5. repec:grz:wpaper:2015-08 is not listed on IDEAS
    6. Mojmir Hampl & Michal Skorepa, 2011. "Long-run equilibrium exchange rate notions in monetary policy strategies: the case of the Czech National Bank," BIS Papers chapters, in: Bank for International Settlements (ed.), Capital flows, commodity price movements and foreign exchange intervention, volume 57, pages 155-162, Bank for International Settlements.
    7. repec:grz:wpaper:2014-06 is not listed on IDEAS
    8. repec:grz:wpaper:2013-07 is not listed on IDEAS
    9. Karl Farmer & Irina Ban, 2017. "Modeling Financial Integration, Intra-EMU and Asian-US External Imbalances," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 23(3), pages 261-281, August.
    10. Karl Farmer, 2016. "The Intertemporal Equilibrium Modeling of Intra-EMU and Global Trade Imbalances," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 22(4), pages 377-395, November.
    11. Herrmann, Sabine & Kleinert, Jörn, 2014. "Lucas paradox and allocation puzzle: Is the euro area different?," Discussion Papers 06/2014, Deutsche Bundesbank.
    12. Karl Farmer, 2013. "EMU Imbalances in a Two-Country Overlapping Generations Model," EcoMod2013 5484, EcoMod.
    13. Spaventa, Luigi & Giavazzi, Francesco, 2010. "Why the current account may matter in a monetary union: Lessons from the financial crisis in the Euro area," CEPR Discussion Papers 8008, C.E.P.R. Discussion Papers.

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    More about this item

    Keywords

    euro area; interest rate convergence; overlapping generations model;
    All these keywords.

    JEL classification:

    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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