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The effect of openness in a small open monetary union

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  • Orjasniemi, Seppo

Abstract

In this paper we build a dynamic stochastic general equilibrium model of a small open monetary union with optimal monetary and fiscal policy, to study the transmission of country specific shocks and associated exchange rate fluctuations. We show that movements of the monetary union s exchange rate stabilize the output fluctuations inside the monetary union, reducing the need for fiscal stabilization. We also show that, under the optimal policy, fluctuations in the exchange rate and the union-wide aggregates are affected by the differences in the degree of nominal rigidities among the monetary union member countries.

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  • Orjasniemi, Seppo, 2010. "The effect of openness in a small open monetary union," Bank of Finland Research Discussion Papers 18/2010, Bank of Finland.
    • Handle: RePEc:zbw:bofrdp:rdp2010_018
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    1. Gali­, Jordi & Monacelli, Tommaso, 2008. "Optimal monetary and fiscal policy in a currency union," Journal of International Economics, Elsevier, vol. 76(1), pages 116-132, September.
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