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A HANK2 Model of Monetary Unions

Discussion Papers 2044, 50 S.

Christian Bayer, Alexander Kriwoluzky, Gernot J. Müller, Fabian Seyrich


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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.

Fabian Seyrich

Ph.D. Student in the Macroeconomics Department

Alexander Kriwoluzky

Head of Department in the Macroeconomics Department

JEL-Classification: F45;E52;D31
Keywords: HANK2, OCA theory, Two-country model, monetary union, spillovers, monetary policy, heterogeneity, inequality, households