Trade, Unemployment, and Monetary Policy

Matteo Cacciatore and Fabio Ghironi

No 27474, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study how trade linkages affect the conduct of monetary policy in a two-country model with heterogeneous firms, endogenous producer entry, and labor market frictions. We show that the ability of the model to replicate key empirical regularities following trade integration---synchronization of business cycles across trading partners and reallocation of market shares toward more productive firms---is central to understanding how trade costs affect monetary policy trade-offs. First, productivity gains through firm selection reduce the need of positive inflation to correct long-run distortions. As a result, lower trade costs reduce the optimal average inflation rate. Second, as stronger trade linkages increase business cycle synchronization, country-specific shocks have more global consequences. Thus, the optimal stabilization policy remains inward looking. By contrast, sub-optimal, inward-looking stabilization---for instance too narrow a focus on price stability---results in larger welfare costs when trade linkages are strong due to inefficient fluctuations in cross-country aggregate demand.

JEL-codes: E24 E32 E52 F16 F41 J64 (search for similar items in EconPapers)
Date: 2020-07
New Economics Papers: this item is included in nep-cba, nep-dge, nep-int, nep-lab, nep-mac, nep-mon and nep-opm
Note: IFM ME
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Citations: View citations in EconPapers (3)

Published as Cacciatore, Matteo & Ghironi, Fabio, 2021. "Trade, unemployment, and monetary policy," Journal of International Economics, Elsevier, vol. 132(C).

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Related works:
Journal Article: Trade, unemployment, and monetary policy (2021)
Working Paper: Trade, Unemployment, and Monetary Policy (2020)
Working Paper: Trade, Unemployment, and Monetary Policy (2013)
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