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Joining the European Monetary Union - Comparing First and Second Generation Open Economy Models

Le, Vo Phuong Mai and Minford, Anthony Patrick Leslie 2006. Joining the European Monetary Union - Comparing First and Second Generation Open Economy Models. Open Economies Review 17 (3) , pp. 281-296. 10.1007/s11079-006-9050-0

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Abstract

We log-linearise the Dellas and Tavlas (DT) model of monetary union and solve it analytically. We find that the intuition of optimal currency area analysis of DT’s second generation open economy model is essentially the same as that of first generation models. Monetary union results in no welfare loss if its member states are symmetric. However, asymmetry causes loss in welfare both due to the failure of the union policy to deal suitably with a country’s asymmetric shocks and due to an active monetary policy by the union in pursuit of its distinct objectives. The asymmetry in DT is largely due to the differing wage rigidities across countries.

Item Type: Article
Date Type: Publication
Status: Published
Schools: Business (Including Economics)
Subjects: H Social Sciences > H Social Sciences (General)
H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
J Political Science > JN Political institutions (Europe)
Uncontrolled Keywords: Monetary union; representative agent model; multi-country model; wage rigidity; asymmetry
Publisher: Springer
ISSN: 0923-7992
Last Modified: 04 Jun 2017 04:30
URI: http://orca.cf.ac.uk/id/eprint/40203

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