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Imperfect Competition, Monetary Policy and Welfare in a Currency Area

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  • Lombardo, Giovanni

Abstract

This paper studies the implication, in terms of welfare and monetary policy, of unequal degrees of competition across members of a currency area. We look at two ways in which the degree of competition in the market for goods can affect welfare in a currency area. One is through different average degrees of competition in the monetary union; the other is through different degrees of competition across its members. We find two interesting results. First, if prices are sticky, more competition tends to be detrimental to welfare. Second, welfare increases in proportion to the asymmetry of the union. These results imply that the monetary authority should react more strongly to inflationary pressure coming from the more competitive member of the monetary union. We compute the optimal monetary policy of the central bank of the union and compare its performance with a simple Taylor rule. We discuss the circumstances under which the Taylor rule approaches the optimal rule. The optimal inflation target for the asymmetric union is also discussed.

Suggested Citation

  • Lombardo, Giovanni, 2002. "Imperfect Competition, Monetary Policy and Welfare in a Currency Area," Discussion Paper Series 1: Economic Studies 2002,21, Deutsche Bundesbank.
  • Handle: RePEc:zbw:bubdp1:4186
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    Cited by:

    1. Beetsma, Roel M. W. J. & Jensen, Henrik, 2004. "Mark-up fluctuations and fiscal policy stabilization in a monetary union," Journal of Macroeconomics, Elsevier, vol. 26(2), pages 357-376, June.
    2. Christian Pierdzioch, 2004. "Financial Market Integration And Business Cycle Volatility In A Monetary Union," Scottish Journal of Political Economy, Scottish Economic Society, vol. 51(3), pages 422-442, August.
    3. Brissimis, Sophocles N. & Skotida, Ifigeneia, 2008. "Optimal monetary policy in the euro area in the presence of heterogeneity," Journal of International Money and Finance, Elsevier, vol. 27(2), pages 209-226, March.
    4. Lombardo, Giovanni, 2006. "Inflation targeting rules and welfare in an asymmetric currency area," Journal of International Economics, Elsevier, vol. 68(2), pages 424-442, March.
    5. Marcin Wolski, 2016. "Welfare-theoretic Optimal Policies in a New-Keynesian Economy with Heterogeneous Regions: Any Role for Financial Integration?," Journal of Common Market Studies, Wiley Blackwell, vol. 54(3), pages 742-761, May.

    More about this item

    Keywords

    Währungsraum; optimale Geldpolitik; Taylor-Regel; unvollständiger Wettbewerb; starre Preise; Currency area; optimal monetary policy; Taylor rule; imperfect competition; sticky prices;

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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