Inflationary performance in a monetary union with large wage setters

Building on a micro-founded model of a two region-world economy in the tradition of the new open economy literature, this paper analyses the strategic interaction of large wage-setters and the central bank when switching from a regime of uncoordinated national monetary policies to a monetary union. The establishment of a monetary union is shown to favour wage restraint, provided the uni…ed central bank is not too conservative. Wage discipline may reduce equilibrium in‡ation in a monetary union relative to the one under uncoordinated national monetary policies when wage setting is centralised across member countries. --monetary union,wage bargaining,inflationary bias

Firms?entry, monetary policy and the international business cycle

This paper studies the role of producer entry for global monetary policy and the propa- gation of the international business cycle in a two-country general equilibrium (DSGE) model with monopoly distortions and imperfect price adjustment. It introduces endogenous entry into the model of Benigno and Benigno (2008) so as to provide a ?rst step towards the joint deter- mination of exchange rates and product varieties under interest rate rules. The paper shows that endogenous product variety has relevant consequences for the dynamics of the exchange rate and the terms of trade, highlighting a novel channel of international cyclical transmission. The paper provides numerical examples of responses to country-speci?c shocks to aggregate productivity, entry costs and monetary policy under plausible interest rate settings with both ?oating and ?xed exchange rates and compare them to their ?exible price counterpart.product variety, ?rm entry, international business cycle, monetary policy, interest rate rules, exchange rate regimes

Firms entry, monetary policy and the international business cycle

This paper provides a novel theory of the international business cycle grounded on firms entry and sticky prices. It shows that under simple monetary rules pro-cyclical entry can generate fluctuations in consumption, output and investment as large as those observed in the data while at the same time providing positive international comovements and highly volatile terms of trade. The capacity to capture these stylized facts of the international business cycle overcomes the well-known difficulties of the standard open economy real business cycle model in this regard. Numerical simulations show that floating regimes exacerbate counter-cyclical markup movements. Fixed regimes, on the other hand, lead to an increase in the volatility of?firm entry.product variety, firm entry, international business cycle, monetary policy, interest rate rules, exchange rate regimes

Trade margins and exchange rate regimes: new evidence from a Panel VAR

This paper studies how trade margins respond to output and terms of trade shocks in different exchange rate regimes within a panel of 23 OECD economies over the period 1988-2011. Using a panel VAR model, we confirm the predictions of entry models about the behaviour of export margins over the cycle. In addition, we find remarkable differences depending on the exchange rate regime. We document that fixed exchange rates have a positive effect on the extensive margin of trade in response to external shocks while flexible exchange rates have a pro-trade effect in response to output shocks. Our results imply that as long as extensive margins are a relevant portion of trade and external shocks are a major source of business cycle variability, the stabilization advantage of flexible exchange rates may be lower than previously thought

Firms' entry, monetary policy and the international business cycle

This paper provides a theory of the international business cycle grounded on firms' entry and sticky prices. It shows that under simple monetary rules pro-cyclical entry and counter-cyclical markups can generate fluctuations in macroeconomic aggregates and trade variables as large as those observed in the data while at the same time providing positive international comovements. Both firms' entry and sticky prices are essential for reproducing the synchronization of the business cycles found in the data

Markups and Entry in a DSGE Model

This paper provides a DSGE model with firm entry. Simulations show that the model matches the synchronization of markups and entry observed in the data while at the same time reproducing empirically plausible moments for key macroeconomic variables. Sticky prices are essential for these results

Markups and Entry in a DSGE Model

This paper provides a DSGE model with firm entry. Simulations show that the model matches the synchronization of markups and entry observed in the data while at the same time reproducing empirically plausible moments for key macroeconomic variables. Sticky prices are essential for these results

Monetary policy with non-homothetic preferences

This paper studies the role of non-homothetic preferences for monetary policy from both a positive and a normative perspective. It draws on a dynamic stochastic general equilibrium model characterized by preferences with a variable elasticity of substitution among goods and with price adjustment costs à la Rotemberg. These preferences have remarkable implications for monetary policy. Three main results stand out from a comparison of models with an increasing and a constant elasticity. First, an increasing elasticity induces novel intertemporal substitution effects that amplify the propagation of monetary and technology shocks. Second, it weakens the ability of a simple Taylor rule to attain a given level of macroeconomic stabilization. Third, the smallest welfare losses can be attained by stabilizing both inflation and output, in contrast to the prevailing view - based on models with a constant elasticity - that the best thing the monetary authority can do is to control inflation only

Business cycle determinants of US foreign direct investments

This paper investigates the role of output fluctuations and exchange rate volatility in driving US foreign direct investments (FDI). Using a sample of 46 economies over the period 1982-2009, we provide evidence of a positive relation between US FDI and host country’s cyclical conditions. Allowing for asymmetry over the business cycle, we find that the output elasticity of foreign investments is higher in booms than in recessions. An increase in exchange rate volatility, on the other hand, has a strong deterrent effect on US foreign investments. This effect is fairly stable over the business cycle