Department of Economics and Business - Universitat Pompeu Fabra

Title:: Fragmented monetary unions
Authors:: Luca Fornaro and Christoph Grosse-Steffen
Date:: April 2024
Abstract:: We provide a theory of financial fragmentation in monetary unions. Our key insight is that currency unions may experience of symmetry: that is episodes in which identical countries react differently when exposed to the same shock. During these events part of the union suffers a capital flight, while the rest acts as a safe haven and receives inflows. The central bank then faces a difficult trade-off between containing unemploymnet in capital-flight countries, and inflationary pressures in safe-haven ones. By counteracting private capital flows with public ones, unconventional monetary interventions mitigate the impact of financial fragmentation on employment and inflation, thus helping the central bank to fulfill its price stability mandate.
Keywords:: Monetary unions, Euro area, fragmentation, optimal monetary policy in openeconomies, capital flows, fiscal crises, unconventional monetary policies, Inflation, endogenous breaking of symmetry, Optimum
JEL codes:: E31, E52, F32, F41, F42, F45.

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