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On financial markets inclompleteness, price stickyness and welfare in a monetary union ?

Author

Listed:
  • Stéphane Auray

    (GREMARS - University of Lille 3)

  • Aurélien Eyquem

    (CREM – CNRS - University of Rennes 1)

Abstract

In this paper, we measure the welfare costs/gains associated with financial market incompleteness in a monetary union. To do this, we build on a two-country model of a monetary union with sticky prices subject to asymmetric productivity shocks. For most plausible values of price stickiness, we show that asymmetric shocks under incomplete financial markets give rise to a lower volatility of national infation rates, which proves welfare improving with respect to the situation of complete financial markets. The corresponding welfare gains are equivalent to an average increase of 1.8% of permanent consumption.

Suggested Citation

  • Stéphane Auray & Aurélien Eyquem, 2008. "On financial markets inclompleteness, price stickyness and welfare in a monetary union ?," Economics Working Paper Archive (University of Rennes & University of Caen) 200802, Center for Research in Economics and Management (CREM), University of Rennes, University of Caen and CNRS.
    • Handle: RePEc:tut:cremwp:200802
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    More about this item

    Keywords

    monetary union; asymmetric shocks; price stickiness; financial market incompleteness; welfare;
    All these keywords.

    JEL classification:

    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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