Welfare Reversals in a Monetary Union

Stéphane Auray, Aurélien Eyquem
2014 American Economic Journal: Macroeconomics  
We show that welfare can be lower under complete financial markets than under autarky in a monetary union with home bias, sticky prices and asymmetric shocks. Such a monetary union is a second-best environment in which the structure of financial markets affects risk-sharing but also shapes the dynamics of inflation rates and the welfare costs from nominal rigidities. Welfare reversals arise for a variety of empirically plausible degrees of price stickiness when the Marshall-Lerner condition is
more » ... et. These results carry over a model with active fiscal policies, and hold within a medium-scale model, although to a weaker extent.
doi:10.1257/mac.6.4.246 fatcat:tnrsxrifgnbp3m6q7pbqghdgge