Monetary Policy in a Currency Union with HeterogeneousLimited Asset Markets Participation

This paper examines monetary policy in a currency union whose member countries exhibitheterogeneous rates of limited asset markets participation (LAMP). As a result risksharing among member countries is imperfect and the monetary transmission mechanismcan dier across countries. In the limit the elasticity of output to the union-widenominal interest rate can be of opposite sign in dierent countries.I develop a tractable model in which the dispersion of asset markets participation(AMP) becomes a key parameter. While monetary policy can guarantee determinacyby following an active or passive rule depending on the sign of the interest-elasticity ofoutput, ignoring dispersion can lead to incorrect computation of the sign and the sizeof the latter. Taking the heterogeneity into account is thus central for sound policyFurthermore, due to the failure of risk sharing, determinacy for union-aggregatesdoes not guarantee determinacy in every member country. However, the more opena country is in trade terms, the greater the rate of LAMP for which the country stilldisplays equilibrium determinacy. For complete openness, determinacy is guaranteed.This underlines the importance of risk sharing and trade integration for the functioningof a currency union....