We show that welfare can be lower under complete financial markets
than under autarky in a monetary union with home bias, sticky prices,
and asymmetric shocks. Such a monetary union is a second-
best environment in which the structure of financial markets affects
risk-sharing but also shapes the dynamics of inflation rates and the
welfare costs from nominal rigidities. Welfare reversals arise for a
variety of empirically plausible degrees of price stickiness when the Marshall-Lerner condition is met. These results carry over a model
with active fiscal policies, and hold within a medium-scale model,
although to a weaker extent.
"Welfare Reversals in a Monetary Union."
American Economic Journal: Macroeconomics,
Price Level; Inflation; Deflation
International Monetary Arrangements and Institutions
Open Economy Macroeconomics