Declining Output Volatility in Germany: Impulses, Propagation, and the Role of Monetary Policy

Abstract

This paper investigates the effect of economic integration on the ability of firms to maintain a collusive understanding about staying out of each other's markets. The paper distinguishes among different types of trade costs: ad valorem, unit, fixed. It is shown that for a sufficient reduction of ad valorem trade costs, a cartel supported by collusion on either quantities or prices will be weakened, thus integration is pro-competitive. If integration consists of a reductions in unit (fixed) trade costs a price setting cartel is strengthened (unaffected), while a quantity setting one is weakened.Output; Volatility; Monetary policy; Markov switching model; State space model; Spectral analysis; DSGE model