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Optimal Monetary and Fiscal Policy with Migration in a Currency Union

Pedro Gomis-Porqueras and Cathy Zhang ()

MPRA Paper from University Library of Munich, Germany

Abstract: We develop an open economy model of a currency union with frictional goods markets and costly migration to study optimal monetary and fiscal policy for the union. Households finance consump- tion with a common currency and can migrate across regions given regional differences in goods market characteristics and microstructure. Equilibrium is generically inefficient due to regional spillovers from migration. While monetary policy alone cannot correct this distortion, fiscal policy can help by taxing or subsidizing at the regional level. When households of only one region can migrate, optimal policy entails a deviation from the Friedman rule and a production subsidy (tax) if there is underinvestment (overinvestment) in migration. Optimal policy when households from both region can migrate is the Friedman rule and zero taxes in both regions.

Keywords: currency unions; costly migration; search frictions; optimal monetary and fiscal policy (search for similar items in EconPapers)
JEL-codes: D8 E4 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac, nep-mig, nep-mon and nep-opm
Date: 2018-01-07
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:83754

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