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Market Deregulation and Optimal Monetary Policy in a Monetary Union

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  • Matteo Cacciatore
  • Giuseppe Fiori
  • Fabio Ghironi

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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19025.

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Date of creation: May 2013
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Handle: RePEc:nbr:nberwo:19025

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

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