Discussion paper
DP15579 Anchored in Troubled Waters: Monetary Unions and Uncertainty
A monetary union shapes the impact of uncertainty on the economy: it does not alter the transmission of common uncertainty shocks, but significantly dampens the adverse effects of country-specific shocks. We establish this result based on time series data for 17 euro-area countries and 13 countries with flexible exchange rates. To rationalize it, we propose a model of a monetary union in which monetary policy responds to common shocks but not to country-specific ones, as each member country is small. The union dampens the effect of country-specific shocks by providing a nominal anchor in the face of country-specific uncertainty, thereby eliminating price level risk.
£6.00
