Before and After the EMU: Financial Integration, Monetary Policy and Welfare Changes

Abstract

This paper studies the welfare impact of a common monetary policy in the context of a two-country, general equilibrium model with liquidity effect and nominal wage contracts, heterogeneous agents, imperfect competition in the labor market, trade in goods, immobility of labor and mobility of capital. Considering different types of shocks, agents are in general better off under the single currency regime, aside from predominantly technological and idiosyncratic shocks for which they prefer the national currencies regime with a floating exchange rate. I also find the welfare gains of the monetary policy to be smaller under the single currency.