Advertisement

Open Economies Review

, Volume 23, Issue 2, pp 319–336 | Cite as

Specific Factors and International Monetary Policy Coordination

  • William D. CraigheadEmail author
Research Article

Abstract

The consequences of intersectoral factor immobility for optimal monetary policy are examined in a “New Open Economy Macroeconomics” framework. When labor cannot be reallocated between tradable and nontradable goods production, this rigidity generates a welfare loss, which increases as the sectors become more different. When prices are predetermined, the model becomes a monetary “specific factor” model. Intersectoral factor immobility complicates the optimal monetary policy problem by creating a tradeoff between stabilizing tradable and nontradable sector labor. When labor is mobile between sectors, policy coordination can significantly reduce labor volatility. When it is not mobile, coordination results in less volatility in tradable sector labor, but increased nontradable sector labor volatility.

Keywords

Monetary policy Exchange rates Intersectoral factor mobility Specific factors Policy coordination 

JEL Classification

F4 E5 

Notes

Acknowledgements

I am grateful to David Hineline, Norm Miller, Esen Onur, Chris Otrok, Katheryn Russ and Eric van Wincoop, two anonymous referees, as well as seminar participants at Wesleyan and the annual meetings of the Midwest, Southern and Western Economic Associations for helpful comments. Any errors are my own.

References

  1. Berger W (2007) Optimal monetary policy and sectoral shocks: is international monetary cooperation beneficial? Scand J Econ 109:267–290CrossRefGoogle Scholar
  2. Berger W (2008) Monetary policy rules and the exchange rate. J Macroecon 30:1064–1084CrossRefGoogle Scholar
  3. Canzoneri M, Cumby R, Diba B (2005) The need for international policy coordination: what’s old, what’s new and what’s yet to come? J Int Econ 66:363–384CrossRefGoogle Scholar
  4. Corsetti G, Pesenti P (2005) International dimensions of optimal monetary policy. J Monet Econ 52:281–305CrossRefGoogle Scholar
  5. DeResende C, Dib A, Kichian M (2010) Alternative optimized monetary policy rules in multi-sector small open economies: the role of real rigidities. Bank of Canada Working Paper 2010-9Google Scholar
  6. Devereux M, Engel C (2003) Monetary policy in the open economy revisited: price setting and exchange-rate flexibility. Rev Econ Stud 70:765–783CrossRefGoogle Scholar
  7. Devereux M, Engel C (2007) Expenditure switching versus real exchange rate stabilization: competing objectives for exchange rate policy. J Monet Econ 54:2346–2374CrossRefGoogle Scholar
  8. Engel C (2002) Expenditure switching and exchange rate policy. NBER Macroeconomics Annual 17:231–272Google Scholar
  9. Friedman M (1953) The case for flexible exchange rates. In: Essays in positive economics. University of Chicago Press, Chicago, pp 157–203Google Scholar
  10. Lee D, Wolpin K (2006) Intersectoral labor mobility and the growth of the service sector. Econometrica 74:1–46CrossRefGoogle Scholar
  11. Obstfeld M, Rogoff K (1995) Exchange rate dynamics redux. J Polit Econ 103:624–660CrossRefGoogle Scholar
  12. Obstfeld M, Rogoff K (2000) New directions for stochastic open economy models. J Int Econ 50:117–153CrossRefGoogle Scholar
  13. Obstfeld M, Rogoff K (2002) Global implications of self-oriented national monetary rules. Q J Econ 117:503–535CrossRefGoogle Scholar
  14. Sutherland A (2004) International monetary policy coordination and financial market integration. CEPR Discussion Paper 4251Google Scholar
  15. Sutherland A (2006) The expenditure switching effect, welfare and monetary policy in a small open economy. J Econ Dyn Control 30:1159–1182CrossRefGoogle Scholar
  16. Tille C (2002) How valuable is exchange rate flexibility? Optimal monetary policy under sectoral shocks. Federal Reserve Bank of New York Staff Report 147Google Scholar
  17. Tille C (2006) On the distributional effects of exchange rate fluctuations. J Int Money Financ 25:1207–1225CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media, LLC 2010

Authors and Affiliations

  1. 1.Department of EconomicsWesleyan UniversityMiddletownUSA

Personalised recommendations