Monetary Policy In A Currency Union With Heterogeneous Limited Asset Markets Participation

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Executive Summary

This paper examines monetary policy in a currency union whose member countries exhibit heterogeneous rates of Limited Asset Markets Participation (LAMP). As a result risk sharing among member countries is imperfect and the monetary transmission mechanism can differ across countries. In the limit the elasticity of output to the union-wide nominal interest rate can be of opposite sign in different countries. The author develops a tractable model in which the dispersion of Asset Markets Participation (AMP) becomes a key parameter.

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