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The Extensive Margin of Trade under Alternative Monetary Policy Regimes

By Stéphane Auray, Aurélien Eyquem and Jean-Christophe Poutineau

Abstract

This paper investigates the impact of alternative monetary policy regimes on the creation of new varieties in open economies. Using a dynamic two-country model incorporating nominal rigidities, international trade and firm entries we compare an independent monetary policy regime to a monetary union regime. We find that a common monetary policy defined by a nominal interest rate rule reactive to inflation increases extensive margin of trade volatility. Simulations based on business cycle frequencies indicate that on average this increase reaches 3%. Although monetary policy interdependence is found to be a key ingredient in generating this effect, we stress that those parameters affecting international trade structures are crucial in determining its magnitude.Extensive Margin, Variety Effect, Monetary Union, Monetary Policy

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