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Market deregulation and optimal monetary policy in a monetary union

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  • Cacciatore, Matteo
  • Fiori, Giuseppe
  • Ghironi, Fabio

Abstract

This paper addresses the consequences of product and labor market deregulation for monetary policy in a two-country monetary union with endogenous product creation and labor market frictions. We show that when regulation is high in both countries, optimal policy requires significant departures from price stability both in the long run and over the business cycle. The adjustment to market reform requires expansionary policy to reduce transition costs, but deregulation reduces static and dynamic inefficiencies, making price stability more desirable once the transition is complete. International synchronization of reforms can eliminate policy tradeoffs generated by asymmetric deregulation.

Suggested Citation

  • Cacciatore, Matteo & Fiori, Giuseppe & Ghironi, Fabio, 2016. "Market deregulation and optimal monetary policy in a monetary union," Journal of International Economics, Elsevier, vol. 99(C), pages 120-137.
    • Handle: RePEc:eee:inecon:v:99:y:2016:i:c:p:120-137
    DOI: 10.1016/j.jinteco.2015.11.002
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    More about this item

    Keywords

    Market deregulation; Monetary union; Optimal monetary policy;
    All these keywords.

    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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