Central banks in a currency union can target inequality in specific member countries by using liquid money as a local policy tool.
It is a core tenet of international economics that joining a currency union like the Eurozone means giving up an independent national monetary policy. This research challenges that assumption, showing that because households use cash to self-insure against local risks, a central bank can address inequality within one specific nation by treating money as a country-specific instrument.
Household Heterogeneity across Countries and Optimal Monetary Policy in a Monetary Union
SSRN · 6498432
The financial situation of households differs substantially across countries, but the implications of this heterogeneity are vastly understudied. We examine how cross-country differences in the share of constrained households affect optimal monetary policy in a currency union. We build a two-country monetary union model with heterogeneous households where imperfect insurance gives rise to consumption inequality within and across countries. Households hold money as a liquid asset to self-insure a