Discussion paper

DP18258 A HANK2 model of monetary unions

How does a monetary union alter the impact of business cycle shocks at the household level? We develop a Heterogeneous Agent New Keynesian model of two countries (HANK²) and show in closed form that a monetary union shifts the adjustment to a shock horizontally - across countries - within the brackets of the union-wide wealth distribution rather than vertically - that is, across the brackets of the union-wide wealth distribution. Calibrating the model to the euro area reveals that a monetary union alters the impact of shocks most strongly in the tails of the wealth distribution but leaves the middle class almost unaffected.


Bayer, C, A Kriwoluzky, G Müller and F Seyrich (2023), ‘DP18258 A HANK2 model of monetary unions‘, CEPR Discussion Paper No. 18258. CEPR Press, Paris & London. https://cepr.org/publications/dp18258