Working Paper: NBER ID: w19356
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: No keywords provided
JEL Codes: F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| optimal monetary stabilization policy (E63) | international competitiveness (F23) |
| optimal monetary stabilization policy (E63) | entry into manufacturing sector (L60) |
| entry into manufacturing sector (L60) | overall composition of exports (F10) |
| optimal monetary stabilization policy (E63) | lower average prices for domestic goods (P22) |
| welfare gains from international policy coordination (F42) | improved welfare outcomes (I38) |
| independent monetary policies (E58) | greater share of exports in differentiated products (F14) |
| monetary policy design (E52) | trade composition (F10) |
| monetary policy design (E52) | terms of trade (F14) |