Working Paper: CEPR ID: DP9616
Authors: Paul R. Bergin; Giancarlo Corsetti
Abstract: Can a country gain international competitiveness by the design of optimal monetary stabilization rules? This paper reconsiders this question by specifying an open-economy monetary model encompassing a ?production relocation externality,? developed in trade theory to analyze the benefits from promoting entry of domestic firms in the manufacturing sector. In a macroeconomic context, this externality provides an incentive for monetary authorities to trade-off output gap with pro-competitive profit stabilization. While helping manufacturing firms to set competitively low prices, optimal pro-competitive stabilization nonetheless results in stronger terms of trade, due to the change in the country?s specialization and composition of exports. The welfare gains from international policy coordination are large relative to the case of self-oriented, strategic conduct of stabilization policy. Empirical evidence confirms that the effects of monetary policy design on the composition of trade predicted by the theory are present in data and are quantitatively important.
Keywords: firm entry; international coordination; monetary policy; optimal tariff; production location externality
JEL Codes: F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Production relocation externality (R32) | Incentives for monetary authorities (E52) |
| Independent monetary policies (E58) | Specialization in differentiated products (L15) |
| Optimal monetary stabilization policy (E63) | Welfare gains (D69) |
| Monetary policy design (E52) | Composition of trade (F10) |
| Changes in monetary policy (E52) | Specialization and composition of exports (F10) |
| International policy coordination (F42) | Gains compared to self-oriented stabilization policies (E63) |