Economides, George Philippopoulos, Apostolis Varthalitis, Petros
Year of Publication:
CESifo Working Paper 5762
This paper quantifies the welfare differences among a monetary union, flexible exchange rates (economic disintegration) and a monetary plus fiscal transfer union (higher economic integration). The vehicle of analysis is a medium-scale New Keynesian DSGE model consisting of two heterogeneous countries. The model is solved using data from Germany and Italy. Our solutions imply that a switch to flexible exchange rates and independent monetary policies would have negligible welfare implications. A similar result applies when we add interregional fiscal tranfers as insurance. By contrast, the addition of fiscal tranfers as redistribution has non-trivial implications and these depend crucially on whether such one-sided transfers trigger moral hazard behavior or not.