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International Competitiveness and Monetary Policy: Strategic Policy and Coordination with a Production Relocation Externality

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  • Paul R. Bergin
  • Giancarlo Corsetti

Abstract

Can a country gain international competitiveness by the design of optimal monetary stabilization rules? This paper reconsiders this question by specifying an open-economy monetary model encompassing a 'production relocation externality,' developed in trade theory to analyze the benefits from promoting entry of domestic firms in the manufacturing sector. In a macroeconomic context, this externality provides an incentive for monetary authorities to trade-off output gap with pro-competitive profit stabilization. While helping manufacturing firms to set competitively low prices, optimal pro-competitive stabilization nonetheless results in stronger terms of trade, due to the change in the country's specialization and composition of exports. The welfare gains from international policy coordination are large relative to the case of self-oriented, strategic conduct of stabilization policy. Empirical evidence confirms that the effects of monetary policy design on the composition of trade predicted by the theory are present in data and are quantitatively important.

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  • Paul R. Bergin & Giancarlo Corsetti, 2013. "International Competitiveness and Monetary Policy: Strategic Policy and Coordination with a Production Relocation Externality," NBER Working Papers 19356, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:19356
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    Cited by:

    1. Cacciatore, Matteo & Fiori, Giuseppe & Ghironi, Fabio, 2016. "Market deregulation and optimal monetary policy in a monetary union," Journal of International Economics, Elsevier, vol. 99(C), pages 120-137.
    2. Dudley Cooke, 2016. "Optimal Monetary Policy with Endogenous Export Participation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 21, pages 72-88, July.
    3. Guilloux-Nefussi, Sophie, 2020. "Globalization, market structure and inflation dynamics," Journal of International Economics, Elsevier, vol. 123(C).
    4. Chu, Angus C. & Cozzi, Guido & Lai, Ching-Chong & Liao, Chih-Hsing, 2015. "Inflation, R&D and growth in an open economy," Journal of International Economics, Elsevier, vol. 96(2), pages 360-374.
    5. David R. DeRemer, 2016. "The Principle of Reciprocity in the 21st Century," CERS-IE WORKING PAPERS 1613, Institute of Economics, Centre for Economic and Regional Studies.
    6. Daniel Goya, 2014. "The Multiple Impacts of the Exchange Rate on Export Diversification," Cambridge Working Papers in Economics 1436, Faculty of Economics, University of Cambridge.
    7. Bodenstein, Martin & Guerrieri, Luca & LaBriola, Joe, 2019. "Macroeconomic policy games," Journal of Monetary Economics, Elsevier, vol. 101(C), pages 64-81.
    8. David De Remer, 2013. "Domestic Policy Coordination in Imperfectly Competitive Markets," Working Papers ECARES ECARES 2013-46, ULB -- Universite Libre de Bruxelles.

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    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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