Advanced Search
MyIDEAS: Login to save this paper or follow this series

Market Deregulation and Optimal Monetary Policy in a Monetary Union

Contents:

Author Info

  • Cacciatore, Matteo
  • Fiori, Giuseppe
  • Ghironi, Fabio

Abstract

The wave of crises that began in 2008 reheated the debate on market deregulation as a tool to improve economic performance. This paper addresses the consequences of increased flexibility in goods and labor markets for the conduct of monetary policy in a monetary union. We model a two-country monetary union with endogenous product creation, labor market frictions, and price and wage rigidities. Regulation affects producer entry costs, employment protection, and unemployment benefits. We first characterize optimal monetary policy when regulation is high in both countries and show that the Ramsey allocation requires significant departures from price stability both in the long run and over the business cycle. Welfare gains from the Ramsey-optimal policy are sizable. Second, we show that the adjustment to market reform requires expansionary policy to reduce transition costs. Third, deregulation reduces static and dynamic inefficiencies, making price stability more desirable. International synchronization of reforms can eliminate policy tradeoffs generated by asymmetric deregulation.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.cepr.org/pubs/dps/DP9742.asp
Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9742.

as in new window
Length:
Date of creation: Nov 2013
Date of revision:
Handle: RePEc:cpr:ceprdp:9742

Contact details of provider:
Postal: Centre for Economic Policy Research, 77 Bastwick Street, London EC1V 3PZ.
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820

Order Information:
Email:

Related research

Keywords: Market deregulation; Monetary union; Optimal monetary policy;

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Felbermayr, Gabriel & Prat, Julien, 2011. "Product market regulation, Firm Selection, and Unemployment," Munich Reprints in Economics 20593, University of Munich, Department of Economics.
  2. Andrea Weber, 2000. "Vacancy durations - a model for employer's search," Applied Economics, Taylor & Francis Journals, vol. 32(8), pages 1069-1075.
  3. Barseghyan, Levon & DiCecio, Riccardo, 2011. "Entry costs, industry structure, and cross-country income and TFP differences," Journal of Economic Theory, Elsevier, vol. 146(5), pages 1828-1851, September.
  4. Florin O. Bilbiie & Ippei Fujiwara & Fabio Ghironi, 2011. "Optimal Monetary Policy with Endogenous Entry and Product Variety," NBER Working Papers 17489, National Bureau of Economic Research, Inc.
  5. Pierpaolo Benigno, 2008. "Price stability with imperfect financial integration," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
  6. Giuseppe Fiori & Giuseppe Nicoletti & Stefano Scarpetta & Fabio Schiantarelli, 2007. "Employment Outcomes and the Interaction Between Product and Labor Market Deregulation: Are They Substitutes or Complements?," Boston College Working Papers in Economics 663, Boston College Department of Economics, revised 08 Aug 2008.
  7. Juillard, Michel, 1996. "Dynare : a program for the resolution and simulation of dynamic models with forward variables through the use of a relaxation algorithm," CEPREMAP Working Papers (Couverture Orange) 9602, CEPREMAP.
  8. Colciago, Andrea & Rossi, Lorenza, 2011. "Endogenous Market Structures and Labor Market Dynamics," MPRA Paper 29311, University Library of Munich, Germany.
  9. Carlos Thomas, 2006. "Search and matching frictions and optimal monetary policy," LSE Research Online Documents on Economics 19782, London School of Economics and Political Science, LSE Library.
  10. Faia, Ester, 2007. "Ramsey monetary policy with labour market frictions," Working Paper Series 0707, European Central Bank.
  11. José Antonio Rodríguez-López, 2011. "Prices and Exchange Rates: A Theory of Disconnect," Review of Economic Studies, Oxford University Press, vol. 78(3), pages 1135-1177.
  12. Ebell, Monique & Haefke, Christian, 2006. "Product Market Deregulation and the U.S. Employment Miracle," IZA Discussion Papers 1946, Institute for the Study of Labor (IZA).
  13. Cavallari, Lilia, 2012. "Firms' entry, monetary policy and the international business cycle," MPRA Paper 41876, University Library of Munich, Germany.
  14. Aoki, Kosuke, 2001. "Optimal monetary policy responses to relative-price changes," Journal of Monetary Economics, Elsevier, vol. 48(1), pages 55-80, August.
  15. Krause, Michael U. & Lubik, Thomas A., 2007. "The (ir)relevance of real wage rigidity in the New Keynesian model with search frictions," Journal of Monetary Economics, Elsevier, vol. 54(3), pages 706-727, April.
  16. Lewis, Vivien, 2012. "Optimal monetary policy and firm entry," IMFS Working Paper Series 50, Institute for Monetary and Financial Stability (IMFS), Goethe University Frankfurt.
  17. David K. Backus & Patrick J. Kehoe & Finn E. Kydland, 1992. "Dynamics of the trade balance and the terms of trade: the S-curve," Working Paper 9211, Federal Reserve Bank of Cleveland.
  18. Mortensen, Dale T & Pissarides, Christopher A, 1994. "Job Creation and Job Destruction in the Theory of Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 61(3), pages 397-415, July.
  19. Matteo Cacciatore, 2012. "International Trade and Macroeconomic Dynamics with Labor Market Frictions," 2012 Meeting Papers 875, Society for Economic Dynamics.
  20. Haltiwanger, John & Scarpetta, Stefano & Schweiger, Helena, 2006. "Assessing job flows across countries : the role of industry, firm size, and regulations," Policy Research Working Paper Series 4070, The World Bank.
  21. Messina, Julián & Vallanti, Giovanna, 2006. "Job Flow Dynamics and Firing Restrictions: Evidence from Europe," IZA Discussion Papers 2045, Institute for the Study of Labor (IZA).
  22. Hamano Masashige, 2012. "International equity and bond positions in a DSGE model with variety risk in consumption," CREA Discussion Paper Series 12-05, Center for Research in Economic Analysis, University of Luxembourg.
  23. Merz, Monika, 1995. "Search in the labor market and the real business cycle," Journal of Monetary Economics, Elsevier, vol. 36(2), pages 269-300, November.
  24. Robert E. Lucas Jr. & Nancy L. Stokey, 1982. "Optimal Fiscal and Monetary Policy in an Economy Without Capital," Discussion Papers 532, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  25. Collard, Fabrice & Dellas, Harris, 2002. "Exchange rate systems and macroeconomic stability," Journal of Monetary Economics, Elsevier, vol. 49(3), pages 571-599, April.
  26. Bergljot Barkbu & Jesmin Rahman & Rodrigo O. Valdés, 2012. "Fostering Growth in Europe Now," IMF Staff Discussion Notes 12/07, International Monetary Fund.
  27. Paul R. Bergin & Robert C. Feenstra, 1999. "Pricing to Market, Staggered Contracts, and Real Exchange Rate Persistence," NBER Working Papers 7026, National Bureau of Economic Research, Inc.
  28. Bergin, Paul R. & Feenstra, Robert C., 2000. "Staggered price setting, translog preferences, and endogenous persistence," Journal of Monetary Economics, Elsevier, vol. 45(3), pages 657-680, June.
  29. Zanetti, Francesco, 2007. "A non-Walrasian labor market in a monetary model of the business cycle," Journal of Economic Dynamics and Control, Elsevier, vol. 31(7), pages 2413-2437, July.
  30. P. Diamond, 1980. "Aggregate Demand Management in Search Equilibrium," Working papers 268, Massachusetts Institute of Technology (MIT), Department of Economics.
  31. Enchuan Shao & Pedro Silos, 2008. "Firm entry and labor market dynamics," Working Paper 2008-17, Federal Reserve Bank of Atlanta.
  32. Benigno, Pierpaolo, 2004. "Optimal monetary policy in a currency area," Journal of International Economics, Elsevier, vol. 63(2), pages 293-320, July.
  33. Turnovsky, Stephen J., 1985. "Domestic and foreign disturbances in an optimizing model of exchange-rate determination," Journal of International Money and Finance, Elsevier, vol. 4(1), pages 151-171, March.
  34. Rotemberg, Julio J, 1982. "Monopolistic Price Adjustment and Aggregate Output," Review of Economic Studies, Wiley Blackwell, vol. 49(4), pages 517-31, October.
  35. Campolmi, Alessia & Faia, Ester, 2011. "Labor market institutions and inflation volatility in the euro area," Journal of Economic Dynamics and Control, Elsevier, vol. 35(5), pages 793-812, May.
  36. Stéphane Auray & Aurélien Eyquem, 2011. "Do Changes in Product Variety Matter for Business Cycles and Monetary Policy in Open Economies?," International Finance, Wiley Blackwell, vol. 14(3), pages 507-539, December.
  37. Diamond, Peter A, 1982. "Wage Determination and Efficiency in Search Equilibrium," Review of Economic Studies, Wiley Blackwell, vol. 49(2), pages 217-27, April.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Cacciatore, Matteo & Ghironi, Fabio & Stebunovs, Viktors, 2014. "The Domestic and International Effects of Interstate U.S. Banking," International Finance Discussion Papers 1111, Board of Governors of the Federal Reserve System (U.S.).
  2. Eggertsson, Gauti & Ferrero, Andrea & Raffo, Andrea, 2014. "Can structural reforms help Europe?," Journal of Monetary Economics, Elsevier, vol. 61(C), pages 2-22.
  3. Cacciatore, Matteo, 2014. "International trade and macroeconomic dynamics with labor market frictions," Journal of International Economics, Elsevier, vol. 93(1), pages 17-30.
  4. Matteo Cacciatore, 2013. "Trade, Unemployment, and Monetary Policy," 2013 Meeting Papers 724, Society for Economic Dynamics.
  5. Dumitriu, Ramona & Stefanescu, Razvan, 2013. "Provocările politicii monetare
    [Monetary policy challenges]
    ," MPRA Paper 50261, University Library of Munich, Germany, revised 28 Sep 2013.
  6. Moretti, Laura, 2014. "The determinants of inflation differentials in the euro area," CFS Working Paper Series 451, Center for Financial Studies (CFS).

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:9742. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.