 Imperfect Competition, Monetary Policy and Welfare in a Currency AreaNo 2002,21, Discussion Paper Series 1: Economic Studies from Deutsche Bundesbank Abstract: This paper studies the implication, in terms of welfare and monetary policy, of unequal degrees of competition across members of a currency area. We look at two ways in which the degree of competition in the market for goods can affect welfare in a currency area. One is through different average degrees of competition in the monetary union; the other is through different degrees of competition across its members. We find two interesting results. First, if prices are sticky, more competition tends to be detrimental to welfare. Second, welfare increases in proportion to the asymmetry of the union. These results imply that the monetary authority should react more strongly to inflationary pressure coming from the more competitive member of the monetary union. We compute the optimal monetary policy of the central bank of the union and compare its performance with a simple Taylor rule. We discuss the circumstances under which the Taylor rule approaches the optimal rule. The optimal inflation target for the asymmetric union is also discussed. Keywords: Währungsraum; optimale Geldpolitik; Taylor-Regel; unvollständiger Wettbewerb; starre Preise; Currency area; optimal monetary policy; Taylor rule; imperfect competition; sticky prices (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:zbw:bubdp1:4186 Access Statistics for this paper More papers in Discussion Paper Series 1: Economic Studies from Deutsche Bundesbank Contact information at EDIRC. |
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