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Monetary policy and the financial accelerator in a monetary union

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  • Simon Gilchrist
  • Jean-Olivier Hairault
  • Hubert Kempf

Abstract

In this paper, we consider the effect of a monetary union in a model with a significant role for financial market imperfections. We do so by introducing a financial accelerator into a stochastic general equilibrium macro model of a two country economy. We show that financial market imperfections introduce important cross-country transmission mechanisms to asymmetric shocks to supply and demand. Within this framework, we study the likely costs and benefits of monetary union. We also consider the effects of cross-country heterogeneity in financial markets. Both the presence of financial frictions and the use of a single currency have significant impacts on the international propagation of exogenous shocks. The introduction of asymmetries in the financial contract widens the difference in cyclical behavior of national economies in a monetary union, but financial integration compensates the loss of policy instruments.

Suggested Citation

  • Simon Gilchrist & Jean-Olivier Hairault & Hubert Kempf, 2002. "Monetary policy and the financial accelerator in a monetary union," International Finance Discussion Papers 750, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgif:750
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    References listed on IDEAS

    as
    1. Stephen G. Cecchetti, 2001. "Legal Structure, Financial Structure and the Monetary Policy Transmission Mechanism," Palgrave Macmillan Books, in: Deutsche Bundesbank (ed.), The Monetary Transmission Process, chapter 5, pages 170-207, Palgrave Macmillan.
    2. Faia, Ester, 2001. "Stabilization policy in a two country model and the role of financial frictions," Working Paper Series 56, European Central Bank.
    3. Gabriele Galati & Kostas Tsatsaronis, 2003. "The impact of the euro on Europe's financial markets," Financial Markets, Institutions & Instruments, John Wiley & Sons, vol. 12(3), pages 165-222, August.
    4. Townsend, Robert M., 1979. "Optimal contracts and competitive markets with costly state verification," Journal of Economic Theory, Elsevier, vol. 21(2), pages 265-293, October.
    5. Mark Gertler & Simon Gilchrist & Fabio M. Natalucci, 2007. "External Constraints on Monetary Policy and the Financial Accelerator," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(2‐3), pages 295-330, March.
    6. Anil K. Kashyap & Jeremy C. Stein, 1997. "The role of banks in monetary policy: a survey with implications for the European Monetary Union," Economic Perspectives, Federal Reserve Bank of Chicago, vol. 22(Sep), pages 2-18.
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    More about this item

    Keywords

    International finance; monetary unions;

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • F0 - International Economics - - General

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