Bulletin n. 0/2004 | ||
December 2004 | ||
Kollman Robert |
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Welfare Effects of a Monetary Union: The Role of Trade Openness | ||
in Journal of the European Economic Association , Vol. 2, Issues 2-3 - April-May , 2004 , 289 - 301 | ||
This paper evaluates the welfare effects of a monetary union (MU), compared to a floating exchange rate regime, using a quantitative business cycle model of a two-country world with sticky prices. It is assumed that, under a float, there are shocks to the uncovered interest rate parity (UIP) condition. These shocks are shown to have a negative effect on welfare—the detrimental effect is stronger, the higher the degree of trade openness. A MU eliminates UIP shocks, and it may thus raise welfare. The welfare gain from MU is positively linked to openness. | ||