Abstract
In this paper, we revisit the subject of country-level macroeconomic adjustment in the euro area in the absence of autonomous monetary and exchange rate policy. We discuss how the real interest rate mechanism and the competitiveness (real exchange rate) channel interact with various aspects of countries’ heterogeneity. Our stylized New Keynesian model of a structurally heterogenous monetary union comprises country-specific empirical hybrid IS and Phillips curves and common Taylor rule. It extends the standard closed-economy specification and replicates both eects in question. Cross-country long-term dierentials
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