%0 Report
        %A Boehnert, Lukas
%A Ferra, Sergio de
%A Mitman, Kurt
%A Romei, Federica
        %T Monetary Policy in Currency Unions with Unequal Countries
        %D 2025
        %8 2025 Jun
        %I Institute of Labor Economics (IZA)
        %C Bonn
        %7 IZA Discussion Paper
        %N 17950
        %U https://www.iza.org/publications/dp17950
        %X We investigate how the composition of expenditure shapes the transmission of monetary policy in a currency union. European Monetary Union data reveal three facts: (1) higher inequality countries have larger service expenditure shares; (2) monetary policy has a weaker output impact in these high-service-share, high-inequality countries; and (3) monetary policy induces systematic trade flows between high- and low-service-share countries. We develop a New Keynesian model with non-homothetic preferences and heterogeneous sectoral income that rationalizes these facts. Pro-cyclical inequality, driven by wealthier households' greater income exposure to services, buffers poorer households' consumption to contractionary shocks, dampening overall policy transmission. Our findings suggest that accounting for cross-country differences in consumption and income distributions is essential for understanding common monetary policy.
        %K currency union
%K monetary policy
%K inequality