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Optimal Currency Areas with Labor Market Frictions†

Optimal Currency Areas with Labor Market Frictions† AbstractI study efficiency and optimal monetary policy in a two-country monetary union with frictional labor markets. With heterogeneity in labor market frictions, the constrained efficient allocation generically cannot be achieved even if productivity shocks affecting each country are the same. The second-best optimal policy targets smaller inflation and output gaps in the more sclerotic labor market. A quantitative calibration to the eurozone implies welfare gains from redefining the union’s inflation target to put more weight on its sclerotic members. (JEL E23, E24, E31, E52, F33, F45) http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png American Economic Journal: Macroeconomics American Economic Association

Optimal Currency Areas with Labor Market Frictions†

Optimal Currency Areas with Labor Market Frictions†

American Economic Journal: Macroeconomics , Volume 14 (2) – Apr 1, 2022

Abstract

AbstractI study efficiency and optimal monetary policy in a two-country monetary union with frictional labor markets. With heterogeneity in labor market frictions, the constrained efficient allocation generically cannot be achieved even if productivity shocks affecting each country are the same. The second-best optimal policy targets smaller inflation and output gaps in the more sclerotic labor market. A quantitative calibration to the eurozone implies welfare gains from redefining the union’s inflation target to put more weight on its sclerotic members. (JEL E23, E24, E31, E52, F33, F45)

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Publisher
American Economic Association
Copyright
Copyright © 2022 © American Economic Association
ISSN
1945-7715
DOI
10.1257/mac.20190002
Publisher site
See Article on Publisher Site

Abstract

AbstractI study efficiency and optimal monetary policy in a two-country monetary union with frictional labor markets. With heterogeneity in labor market frictions, the constrained efficient allocation generically cannot be achieved even if productivity shocks affecting each country are the same. The second-best optimal policy targets smaller inflation and output gaps in the more sclerotic labor market. A quantitative calibration to the eurozone implies welfare gains from redefining the union’s inflation target to put more weight on its sclerotic members. (JEL E23, E24, E31, E52, F33, F45)

Journal

American Economic Journal: MacroeconomicsAmerican Economic Association

Published: Apr 1, 2022

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