Trade, Unemployment, and Monetary Policy

Matteo Cacciatore

No 724, 2013 Meeting Papers from Society for Economic Dynamics

Abstract: We study the effects of trade integration for the conduct of monetary policy in a two-country model with heterogeneous firms, endogenous producer entry, and labor market frictions. The model reproduces important empirical regularities related to international trade, namely synchronization of business cycles across trading partners and reallocation of market shares across producers. Three key results emerge. First, when trade linkages are weak, the optimal policy is inward-looking but requires significant departures from price stability both in the long run and over the business cycle. Second, as trade integration reallocates market share toward more productive firms, the need of positive inflation to correct long-run distortions is reduced. Third, increased business cycle synchronization implies that country-specific shocks have more global consequences. Welfare gains from cooperation are small relative to optimal non-cooperative policy, but sizable relative to historical Federal Reserve behavior. The constrained efficient allocation generated by optimal cooperative policy can still be achieved by appropriately designed inward-looking policy rules. However, sub-optimal (historical) policy implies inefficient fluctuations in cross-country demands that result in large welfare costs when trade linkages are strong.

Date: 2013
New Economics Papers: this item is included in nep-dge, nep-int, nep-mac and nep-mon
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Citations: View citations in EconPapers (11)

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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 (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed013:724

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