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Small countries in monetary unions A two-tier model

1986; Elsevier BV; Volume: 10; Issue: 1-2 Linguagem: Inglês

10.1016/0165-1889(86)90050-3

1879-1743

Jorge Braga de Macedo,

Monetary Policy and Economic Impact

In a previous analysis of the West African Monetary Union, Macedo (1985a), size is taken to be a major structural characteristic of a country in the sense that large countries are not affected by disturbances originating in small countries but small countries are affected by large countries' domestic disturbances.In this paper, we generalize some of the results and present the structure of the model in more detail.Using a four-country, two-tier macroeconomic model, it is shown that the pseudo-exchange rate union of the two small countries with the large partner has no effect on their real exchange rates but affects their price levels, whereas a full monetary union requires in principle a transfer from the large partner in the anion.The allocation of this transfer between the two small countries by their common central bank will have real effects when the allocation rule differs from the steady-state monetary distribution.