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Which policy-mix to mitigate the effects of financial heterogeneity in a monetary union?

Author

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  • Christina Badarau

    (Larefi, Université Bordeaux IV)

  • Grégory Levieuge

    (LEO,Université d'Orléans)

Abstract

This paper aims to study a suitable policy-mix for a monetary union like the euro area, in a context of financial heterogeneity. It relies on a DSGE model with empirically-justified heterogeneous bank capital channel, with financial shocks, in addition to monetary, budgetary and technological ones. The analysis leads to the following conclusions. A centralized monetary policy appears to be more advantageous for the union than an alternative inflation-divergences oriented policy. Besides, national budgetary policies can mitigate cyclical divergences. Nevertheless, the exam of various policy-mixes indicates that the superiority of a cooperative budgetary regime only relies on the fact that it allows a better stabilization of public spending divergences in the Union. On the other hand, national variables are less stabilized under this regime. These results are finally discussed in light of the subprime mortgage crisis context.

Suggested Citation

  • Christina Badarau & Grégory Levieuge, 2011. "Which policy-mix to mitigate the effects of financial heterogeneity in a monetary union?," Larefi Working Papers 1109, Larefi, Université Bordeaux 4.
    • Handle: RePEc:laf:wpaper:cr1109
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    2. Julia Durcova, 2021. "The Impact of Interest Rate Transmission Channel on the Prices Development in the Eurozone Countries," Montenegrin Journal of Economics, Economic Laboratory for Transition Research (ELIT), vol. 17(2), pages 23-35.

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    More about this item

    Keywords

    euro area; financial heterogeneity; monetary/budgetary policy rules; DSGE model.;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

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