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

  • Bergin, Paul R
  • Corsetti, Giancarlo

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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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9616.

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Date of creation: Aug 2013
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Handle: RePEc:cpr:ceprdp:9616
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  1. Florin Bilbiie & Fabio Ghironi & Marc Melitz, 2008. "Monetary Policy and Business Cycles with Endogenous Entry and Product Variety," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-00622866, HAL.
  2. Giancarlo Corsetti & Luca Dedola & Sylvain Leduc, 2010. "Optimal monetary policy in open economies," Economics Working Papers ECO2010/35, European University Institute.
  3. Michael Devereux & Charles Engel, 2000. "Monetary Policy in the Open Economy Revisited: Price Setting and Exchange Rate Flexibiity," Working Papers 0016, University of Washington, Department of Economics.
  4. Obstfeld, Maurice & Rogoff, Kenneth, 2000. "New directions for stochastic open economy models," Journal of International Economics, Elsevier, vol. 50(1), pages 117-153, February.
  5. Reinhart, Carmen M. & Rogoff, Kenneth S., 2013. "Banking crises: An equal opportunity menace," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4557-4573.
  6. Fabio Ghironi & Marc J. Melitz, 2005. "International Trade and Macroeconomic Dynamics with Heterogeneous Firms," The Quarterly Journal of Economics, Oxford University Press, vol. 120(3), pages 865-915.
  7. Canzoneri, Matthew B. & Cumby, Robert E. & Diba, Behzad T., 2005. "The need for international policy coordination: what's old, what's new, what's yet to come?," Journal of International Economics, Elsevier, vol. 66(2), pages 363-384, July.
  8. Campolmi, Alessia & Fadinger, Harald & Forlati, Chiara, 2014. "Trade policy: Home market effect versus terms-of-trade externality," Journal of International Economics, Elsevier, vol. 93(1), pages 92-107.
  9. repec:hal:journl:hal-00622866 is not listed on IDEAS
  10. Lilia Cavallari, 2009. "Export And Foreign Direct Investments In An Endogenous-Entry Model With Real And Nominal Uncertainty," Working Papers 0209, CREI Università degli Studi Roma Tre, revised 2009.
  11. Giancarlo Corsetti & Philippe Martin & Paolo Pesenti, 2007. "Productivity, terms of trade and the 'home market effect'," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00176911, HAL.
  12. James E. Rauch, 1996. "Networks versus Markets in International Trade," NBER Working Papers 5617, National Bureau of Economic Research, Inc.
  13. Carmen M. Reinhart, 2010. "This Time is Different Chartbook: Country Histories on Debt, Default, and Financial Crises," NBER Working Papers 15815, National Bureau of Economic Research, Inc.
  14. Krugman, Paul, 1980. "Scale Economies, Product Differentiation, and the Pattern of Trade," American Economic Review, American Economic Association, vol. 70(5), pages 950-59, December.
  15. Sutherland, Alan, 2004. "International Monetary Policy Coordination and Financial Market Integration," CEPR Discussion Papers 4251, C.E.P.R. Discussion Papers.
  16. Robert C. Feenstra & Robert E. Lipsey & Haiyan Deng & Alyson C. Ma & Hengyong Mo, 2005. "World Trade Flows: 1962-2000," NBER Working Papers 11040, National Bureau of Economic Research, Inc.
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