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Optimal Monetary and Fiscal Policy with Migration in a Currency Union

Author

Listed:
  • Pedro, Gomis-Porqueras
  • Cathy, Zhang

Abstract

We develop an open economy model of a currency union with frictional goods markets and costly migration to study optimal monetary and fiscal policy for the union. Households finance consump- tion with a common currency and can migrate across regions given regional differences in goods market characteristics and microstructure. Equilibrium is generically inefficient due to regional spillovers from migration. While monetary policy alone cannot correct this distortion, fiscal policy can help by taxing or subsidizing at the regional level. When households of only one region can migrate, optimal policy entails a deviation from the Friedman rule and a production subsidy (tax) if there is underinvestment (overinvestment) in migration. Optimal policy when households from both region can migrate is the Friedman rule and zero taxes in both regions.

Suggested Citation

  • Pedro, Gomis-Porqueras & Cathy, Zhang, 2018. "Optimal Monetary and Fiscal Policy with Migration in a Currency Union," MPRA Paper 83754, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:83754
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    File URL: https://mpra.ub.uni-muenchen.de/83754/1/MPRA_paper_83754.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    currency unions; costly migration; search frictions; optimal monetary and fiscal policy;

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates

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