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

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  • P. Cavelaars

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.

Suggested Citation

  • P. Cavelaars, 2001. "Monetary Policy and Competition Policy in a Two-Country, Two-Sector Model," MEB Series (discontinued) 2001-2, Netherlands Central Bank, Monetary and Economic Policy Department.
  • Handle: RePEc:dnb:mebser:2001-2
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    File URL: https://www.dnb.nl/binaries/ms2001-02_tcm46-147302.pdf
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    1. Giancarlo Corsetti & Paolo Pesenti, 2001. "Welfare and Macroeconomic Interdependence," The Quarterly Journal of Economics, Oxford University Press, vol. 116(2), pages 421-445.
    2. Lane, Philip R., 1997. "Inflation in open economies," Journal of International Economics, Elsevier, vol. 42(3-4), pages 327-347, May.
    3. Stiglitz, Joseph E, 1984. "Price Rigidities and Market Structure," American Economic Review, American Economic Association, vol. 74(2), pages 350-355, May.
    4. 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.
    5. Rauf Gönenç & Maria Maher & Giuseppe Nicoletti, 2003. "The Implementation and the Effects of Regulatory Reform: Past Experience and Current Issues," OECD Economic Studies, OECD Publishing, vol. 2001(1), pages 11-98.
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