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Market Deregulation and Optimal Monetary Policy in a Monetary Union

Author

Listed:
  • Giuseppe Fiori

    (University of Sao Paulo)

  • Fabio Ghironi

    (Boston College)

  • Matteo Cacciatore

    (HEC Montreal)

Abstract
The global crisis that began in 2008 reheated the debate on market deregulation as a tool to spur economic performance. This paper addresses the consequences of increased flexibility in goods and labor markets for the conduct of monetary policy in a monetary union. We model a two-country monetary union with endogenous product creation, labor market frictions, and price and wage rigidities. We allow regulation in goods and labor markets to differ across countries. We first characterize optimal monetary policy when regulation is high and show that the Ramsey allocation requires significant departures from price stability both in the long run and over the business cycle. Welfare gains from the Ramsey-optimal policy are sizable. Second, we show that the adjustment to market reform requires expansionary policy to reduce transition costs. Third, deregulation reduces static and dynamic inefficiencies, making price stability more desirable. International coordination of reforms is beneficial as it eliminates policy tradeoffs generated by asymmetric deregulation.

Suggested Citation

  • Giuseppe Fiori & Fabio Ghironi & Matteo Cacciatore, 2012. "Market Deregulation and Optimal Monetary Policy in a Monetary Union," 2012 Meeting Papers 678, Society for Economic Dynamics.
    • Handle: RePEc:red:sed012:678
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    More about this item

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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