A general framework for the macroeconomic analysis of monetary unions

Abstract

The objective of this paper is to develop a general framework for the macroeconomic modelling of monetary unions, which could be useful for policy analysis, as well as for teaching purposes. Our starting point will be the standard two-country Mundell-Fleming model with perfect capital mobility, extended to incorporate the supply side, and modified so that the money market is common for two countries forming a monetary union. The model is presented in two versions: for a small and a big monetary union, respectively. After solving each model, we will derive multipliers for monetary, real (i. e., demand-side), supply, and external shocks, paying a special attention to the distinction between symmetric and asymmetric shocks. A graphical analysis is also provided.