Abstract
In this paper, we measure the welfare costs/gains associated with flnancial market incompleteness in a monetary union. To do this, we build on a two-country model of a monetary union with sticky prices subject to asymmetric productivity shocks. For most plausible values of price stickiness, we show that asymmetric shocks under incomplete flnancial markets give rise to a lower volatility of national in∞ation rates, which proves welfare improving with respect to the situation of complete flnancial markets. The corresponding welfare gains are equivalent to an average increase of 1.8% of permanent consumption.
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