The effect of openness in a small open monetary union

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Title: The effect of openness in a small open monetary union
Author: Orjasniemi, Seppo
Organization: Bank of Finland
Series: Bank of Finland Research Discussion Papers
Series number: 18/2010
Year of publication: 2010
Publication date: 8.6.2010
Pages: 31 s.
Keywords: avoimuus; ulkomaankauppa; vaikutukset; rahapolitiikka; finanssipolitiikka; valuuttakurssit; mallit;
Abstract: In this paper we build a dynamic stochastic general equilibrium model of a small open monetary union with optimal monetary and fiscal policy, to study the transmission of country specific shocks and associated exchange rate fluctuations. We show that movements of the monetary union s exchange rate stabilize the output fluctuations inside the monetary union, reducing the need for fiscal stabilization. We also show that, under the optimal policy, fluctuations in the exchange rate and the union-wide aggregates are affected by the differences in the degree of nominal rigidities among the monetary union member countries.

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