Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5066877 | European Economic Review | 2013 | 19 Pages |
â¢When there is specialization in production a common shock affects similar countries differently.â¢The differential effects across the monetary union's countries of a monetary shock are important.â¢The fluctuations created by the monetary shocks have lower volatility in the richer countries.
It is believed that a common monetary policy in a monetary union will have identical effects on different countries as long as these countries have identical fundamentals. We show that, when there is specialization in production, the terms of trade react to the shock. The transmission mechanism of a monetary shock has in this case an additional channel, the terms of trade. This is the case even if state contingent assets can be traded across countries. For a reasonable parametrization, the differential on the transmission across countries is quantitatively significant when compared with the effect on the union's aggregates. Monetary shocks create cycles with higher volatility in “poor” countries than in “richer” ones.