TY  - RPRT
        AU  - Boehnert, Lukas
AU  - Ferra, Sergio de
AU  - Mitman, Kurt
AU  - Romei, Federica
        TI  - Monetary Policy in Currency Unions with Unequal Countries
        PY  - 2025/Jun/
        PB  - Institute of Labor Economics (IZA)
        CY  - Bonn
        T2  - IZA Discussion Paper
        IS  - 17950
        UR  - https://www.iza.org/publications/dp17950
        AB  - 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.
        KW  - currency union
KW  - monetary policy
KW  - inequality
        ER  -