Abstract
This paper evaluates the welfare effects of a monetary union (MU), compared to a e oating exchange rate regime, using a quantitative business cycle model of a two-country world with sticky prices. It is assumed that, under a e oat, there are shocks to the uncovered interest rate parity (UIP) condition. These shocks are shown to have a negative effect on welfare— the detrimental effect is stronger, the higher the degree of trade openness. A MU eliminates UIP shocks, and it may thus raise welfare. The welfare gain from MU is positively linked to openness. (JEL: E4, F3, F4)
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