Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/324200 
Year of Publication: 
2025
Series/Report no.: 
MAGKS Joint Discussion Paper Series in Economics No. 12-2025
Publisher: 
Philipps-University Marburg, School of Business and Economics, Marburg
Abstract: 
The financial situation of households differs substantially across countries, but the implications of this heterogeneity are still vastly understudied. We examine the implications of this asymmetry for optimal monetary policy in a currency union. We build a two-country monetary union model with heterogeneous households leading to inequality due to imperfect insurance. Money is introduced through central bank digital currency (CBDC) as a liquid asset to self-insure against idiosyncratic risk. CBDC is a new instrument which allows the central bank to target heterogeneity within a monetary union. We derive a welfare function with two additional objectives, consumption inequality within and across countries. The more heterogeneous households are, the less important inflation stabilization becomes in favor of stabilizing consumption inequality through providing money. Our research provides important policy implications as we show that it is beneficial for a monetary union to have a country-specific instrument to compensate for country differentials.
Subjects: 
Heterogeneous Households
Imperfect Insurance
Optimal Monetary Policy
Monetary Union
Two-Country Model
JEL: 
E52
E61
F45
Document Type: 
Working Paper

Files in This Item:
File
Size





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.