Title: Monetary policy and the financial accelerator in a monetary union
Description: "In this paper, we consider the effect of a monetary union in a model with a significant role for financial market imperfections.  We do so by introducing a financial accelerator into a stochastic general equilibrium macro model of a two country economy.  We show that financial market imperfections introduce important cross-country transmission mechanisms to asymmetric shocks to supply and demand.  Within this framework, we study the likely costs and benefits of monetary union.  We also consider the effects of cross-country heterogeneity in financial markets.  Both the presence of financial frictions and the use of a single currency have significant impacts on the international propagation of exogenous shocks.  The introduction of asymmetries in the financial contract widens the difference in cyclical behavior of national economies in a monetary union, but financial integration compensates the loss of policy instruments"--Federal Reserve Board web site.