International Trade Shocks Under Alternative Monetary Agreements

This paper examines the consequences of trade shocks under alternative monetary agreements (and/or different exchange rate regimes). First, we develop a simple two-country model in order to analyse in strategic terms how the authorities can deal with trade shocks when there are no restrictions in using the exchange rate and monetary policy as instruments of macroeconomic stabilization. Next, we compare the results with the case of a monetary union. Particularly, we would evaluate the costs of losing independence in the use of the exchange rate and monetary policy, and the restrictions derived from the fiscal discipline required for supporting monetary agreements. In this way, we would be able to show to what extent different monetary agreements (and/or different exchange rate regimes) would affect the vulnerability of an economy to external shocks.

Key words: Trade shocks, exchange rate, monetary union.
JEL Classification: F41, F33, F42.