Optimal Currency Areas with Labor Market Frictions

Rohan Kekre

American Economic Journal: Macroeconomics, 2022, vol. 14, issue 2, 44-95

Abstract: I study efficiency and optimal monetary policy in a two-country monetary union with frictional labor markets. With heterogeneity in labor market frictions, the constrained efficient allocation generically cannot be achieved even if productivity shocks affecting each country are the same. The second-best optimal policy targets smaller inflation and output gaps in the more sclerotic labor market. A quantitative calibration to the eurozone implies welfare gains from redefining the union's inflation target to put more weight on its sclerotic members.

JEL-codes: E23 E24 E31 E52 F33 F45 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1257/mac.20190002

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