By Oscar Bajo-Rubio
The publication develops a basic framework for the macroeconomic modeling of economic unions. the start line of the research is the traditional two-country Mundell-Fleming version with excellent capital mobility, prolonged to include the availability aspect in a context of inflexible actual wages, and changed in order that the cash marketplace is usual for 2 nations forming a financial union. The version is gifted in types: for a small and a wide financial union, respectively. After fixing every one version, the authors derive multipliers for financial, expenditure, offer, and exterior shocks, either within the brief and the longer term; a graphical research is additionally supplied. unique recognition is paid to the an important contrast among symmetric and uneven shocks.
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Extra resources for Macroeconomic Analysis of Monetary Unions: A General Framework Based on the Mundell-Fleming Model
However, if the effect of price changes prevails over that of the appreciation of the exchange rate, LL, AS1 and AS2 will shift to the left, so that country 1s output increases by less and its prices by more; whereas country 2s output decreases by more, and its prices decrease by less (or might even increase). As in the case of the small monetary union, we can derive the necessary conditions for a country-specific expenditure shock to be asymmetric from the multipliers in the Appendix. In the short run, the conditions are: c\ 2aðd þ /Þ þ eð1 À 3b/Þ 4e so that the probability of a country-specific expenditure shock being asymmetric in the short run increases with: 34 Macroeconomic Analysis of Monetary Unions y2 3 3 2 L (a) y2 Y 2 (d) 1 1 Y L 45º y1 AS1 p1 (b) y2 p2 AS2 (c) 2 1 2 3 3 1 AD1 AD2 y1 y2 Fig.
The effect of a positive shock to the trade balance following an increase in foreign output, Dy* [ 0, would be analogous to the case of a common expansionary expenditure shock as shown in Fig. 4. In turn, a positive shock to the trade balance following an increase in foreign prices, Dp* [ 0, would have no effect either in the short or the long run. The only effect would be an exchange rate appreciation equal, in absolute value, to the initial increase in foreign prices (simultaneous leftward and 3 The Model for a Small Monetary Union L y2 1 25 y2 Y 1 2 (a) 2 3 (d) 3 L Y 45º y1 p1 y2 p2 3 3 2 2 (b) AS1 1 AS2 (c) 1 AD2 AD1 y1 y2 Fig.
Before and after prices fully adjust to equilibrium, respectively. The solutions to the models are presented for the different shocks analyzed (monetary, expenditure, supply, and external), both algebraically and graphically. The complete sets of equations for each model are shown in Tables 1 and 2, and a summary of their solutions in Tables 3 and 4, for the small and large monetary union, respectively. A crucial point concerns the role of asymmetric shocks. The main feature of a monetary union is that all the member countries share a common monetary policy.