Market Deregulation and Optimal Monetary Policy in a Monetary Union

Giuseppe Fiori, Fabio Ghironi and Matteo Cacciatore

No 678, 2012 Meeting Papers from Society for Economic Dynamics

Abstract: The global crisis that began in 2008 reheated the debate on market deregulation as a tool to spur economic performance. This paper addresses the consequences of increased flexibility in goods and labor markets for the conduct of monetary policy in a monetary union. We model a two-country monetary union with endogenous product creation, labor market frictions, and price and wage rigidities. We allow regulation in goods and labor markets to differ across countries. We first characterize optimal monetary policy when regulation is high and show that the Ramsey allocation requires significant departures from price stability both in the long run and over the business cycle. Welfare gains from the Ramsey-optimal policy are sizable. Second, we show that the adjustment to market reform requires expansionary policy to reduce transition costs. Third, deregulation reduces static and dynamic inefficiencies, making price stability more desirable. International coordination of reforms is beneficial as it eliminates policy tradeoffs generated by asymmetric deregulation.

Date: 2012
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mon and nep-opm
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Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Market deregulation and optimal monetary policy in a monetary union (2016)
Working Paper: Market Deregulation and Optimal Monetary Policy in a Monetary Union (2013)
Working Paper: Market Deregulation and Optimal Monetary Policy in a Monetary Union (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed012:678

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