Optimal monetary policy in a currency union with labour market heterogeneity

Nikolaos Kontogiannis ()

No 2015.04, Working Papers from International Network for Economic Research - INFER

Abstract: I construct a New Keynesian, two-country model with labour market frictions in the search and matching process and real wage rigidity. Following a linear-quadratic approach, I analyse quantitatively the welfare-based optimal monetary policy in a currency union. I allow for labour market heterogeneity among the member states captured by an index based on the real wage rigidity differential. I show that when the optimal monetary policy is conducted, in the presence of productivity shocks, thewelfare loss in the currency union increasesmonotonically with the value of the labour market heterogeneity index. That is based on the key role of the terms of trade which intensify the effects of the shocks. I also draw the implications of labour market heterogeneity for the optimal regime choice by the central bank.

Keywords: Currency union; Optimal monetary policy; Labour market heterogeneity. (search for similar items in EconPapers)
Pages: 33 pages
Date: 2015
New Economics Papers: this item is included in nep-dge, nep-mac, nep-mon and nep-opm
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:inf:wpaper:2015.04

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