Market Deregulation and Optimal Monetary Policy in a Monetary Union

Fabio Ghironi, Giuseppe Fiori and Matteo Cacciatore

No 9742, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The wave of crises that began in 2008 reheated the debate on market deregulation as a tool to improve 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. Regulation affects producer entry costs, employment protection, and unemployment benefits. We first characterize optimal monetary policy when regulation is high in both countries 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 synchronization of reforms can eliminate policy tradeoffs generated by asymmetric deregulation.

Keywords: Market deregulation; Monetary union; Optimal monetary policy (search for similar items in EconPapers)
JEL-codes: E24 E32 E52 F41 J64 L51 (search for similar items in EconPapers)
Date: 2013-11
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac, nep-mon, nep-opm and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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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 (2012)
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