Financial Heterogeneity in a Monetary Union

Abstract

This paper addresses the issue of macroeconomic policies in a financially heterogeneous monetary union. Optimized policy rules are used, under various budgetary policy scenarios, in a two-country DSGE model. The results indicate that a Euro-wide monetary policy strategy based on national information does not offset the costs associated with the abandonment of national monetary policy. Decentralized budgetary policies need to be more proactive in countries which are structurally more sensitive to shocks. For independent common monetary policy, cooperation between governments is comparable to a coalition, causing losses for every member. Welfare improvement at the union level only results from reducing public expenditure divergences.

Banking Stability and Prudential Regulation Interactions in DSGE Model for Tunisia

“…To match the financial framework, the model adds the banking sector and the financial market. Taking into account the place occupied by the bank in financial stability, the model analyzes the firm's balance sheet channel of Bernanke et al ( 1999 ), and the bank capital channel of Badarau and Levieuge ( 2011 , 2013 ) and constructed a boom-bust process inspired by Bernanke and Gertler ( 2000 ), and Svensson and Tetlow ( 2005 ). Thus, the model features a more or less standard model layout with various nominal and real frictions to which second financial friction and portfolio choice are added.…”