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


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.


Monetary policy Exchange rates Intersectoral factor mobility Specific factors Policy coordination 

JEL Classification

F4 E5 



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.


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Copyright information

© Springer Science+Business Media, LLC 2010

Authors and Affiliations

  1. 1.Department of EconomicsWesleyan UniversityMiddletownUSA

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