Fragmented monetary unions

Fornaro, Luca; Grosse-Steffen, Christoph

Fragmented monetary unions

Citation

Fornaro, L, Grosse-Steffen, C. Fragmented monetary unions. 2025. handle: http://hdl.handle.net/10230/59735

This citation was generated automatically.

Abstract

We provide a theory of financial fragmentation in monetary unions. Our key insight is that currency unions may experience endogenous breakings of symmetry: that is episodes in which identical countries react differently when exposed to the same shock. During these events part of the union suffers a capital flight, while the rest acts as a safe haven and receives capital inflows. The central bank then faces a difficult trade-off between containing unemployment in capital-flight countries, and inflationary pressures in safe-haven ones. By counteracting private capital flows with public ones, anti-fragmentation monetary programs mitigate the impact of financial fragmentation on employment and inflation, thus helping the central bank to fulfill its price stability mandate.