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Monetary Policy and Competition Policy in a Two-Country, Two-Sector Model

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  • P. Cavelaars
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    Abstract

    This paper introduces different degrees of product market competition into Obsfeld and Rogoff's inter temporal monetary model. Competition is allowed to vary across sectors and countries. Contray to Obstfeld-Rogoff (1995), money retrains its log-run non-neutrality property when non-tradables are included and exchange rate overshooting takes place even under unitary elasticity of money demand. I find a modified version of the 'exchange rate magnification effect' stressed by Hau (2000). Furthermore, the competition parameter is interpreted as a policy instrument. This enables me to study competition enhancement in the European services sector and its implications for monetary policy. It is shown that, under certain conditions, enhanced competition can have an upward impact on the general price level.

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    File URL: http://www.dnb.nl/binaries/ms2001-02_tcm46-147302.pdf
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    Bibliographic Info

    Paper provided by Netherlands Central Bank, Monetary and Economic Policy Department in its series MEB Series (discontinued) with number 2001-2.

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    Date of creation: Mar 2001
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    Handle: RePEc:dnb:mebser:2001-2

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    Web page: http://www.dnb.nl/en/
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    1. Stiglitz, Joseph E, 1984. "Price Rigidities and Market Structure," American Economic Review, American Economic Association, vol. 74(2), pages 350-55, May.
    2. Rauf Gönenç & Maria Maher & Giuseppe Nicoletti, 2001. "The Implementation and the Effects of Regulatory Reform: Past Experience and Current Issues," OECD Economic Studies, OECD Publishing, vol. 2001(1), pages 11-98.
    3. Giancarlo Corsetti & Paolo Pesenti, 2001. "Welfare And Macroeconomic Interdependence," The Quarterly Journal of Economics, MIT Press, vol. 116(2), pages 421-445, May.
    4. Lane, Philip R., 1997. "Inflation in open economies," Journal of International Economics, Elsevier, vol. 42(3-4), pages 327-347, May.
    5. Hau, Harald, 2000. "Exchange rate determination: The role of factor price rigidities and nontradeables," Journal of International Economics, Elsevier, vol. 50(2), pages 421-447, April.
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