Hostname: page-component-cd9895bd7-mkpzs Total loading time: 0 Render date: 2024-12-28T03:00:19.215Z Has data issue: false hasContentIssue false
  • English
  • Français

RETHINKING OPTIMAL EXCHANGE RATE REGIMES WITH FRICTIONAL LABOR MARKETS

Published online by Cambridge University Press:  31 January 2014

Alessia Campolmi  and
Ester Faia
Alessia Campolmi
Affiliation:
Central European University and Magyar Nemzeti Bank
Ester Faia*
Affiliation:
Goethe University Frankfurt and CFS
*
Address correspondence to: Ester Faia, Department of Money and Macro, Goethe University Frankfurt, House of Finance, office 3.47, Grueneburgplatz 1, 60323, Frankfurt am Main, Germany; e-mail: faia@wiwi.uni-frankfurt.de. URL: www.wiwi.uni-frankfurt.de/profs/faia.
Get access Rights & Permissions [Opens in a new window]

Abstract

Currency fluctuations are an important determinant of labor market dynamics. Vice versa, relative labor costs affect real exchange rate dynamics. The optimal choice of exchange rate regimes cannot neglect this nexus. We assess such a choice using a two-country model with frictional labor markets. The monetary authority faces a tension between the classical insulating property of floating exchange rates and the destabilizing effects of currency fluctuations on (relative) job flows. Results show that the second motive is important: optimal monetary policy prescribes (some) response to the exchange rate. We also reexamine the conditions for optimal policy in a currency area whose members experience asymmetries in labor market institutions.

Keywords

Optimal Exchange Rate RegimesFrictional Labor MarketsWelfare
Type
Articles
Information
Macroeconomic Dynamics , Volume 19 , Issue 5 , July 2015 , pp. 1116 - 1147
Copyright
Copyright © Cambridge University Press 2014 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Andolfatto, D. (1996) Business cycles and labor market search. American Economic Review 86, 112–132.Google Scholar
Backus, David K., Kehoe, Patrick J., and Kydland, F.E. (1992) International real business cycles. Journal of Political Economy 101, 745–775.CrossRefGoogle Scholar
Blanchflower, David G., Oswald, Andrew J., and Sanfey, Peter (1996) Wages, profits, and rent-sharing. Quarterly Journal of Economics 111 (1), 227–251.CrossRefGoogle Scholar
Buch, C., Monti, P., and Toubal, F. (2008) Trade's Impact on the Labor Share: Evidence from German and Italian Regions. IAW discussion paper 46.Google Scholar
Buch, C. and Schlotter, M. (2008) Regional Origins of Employment Volatility: Evidence from German States. CES IFO working paper 2296.CrossRefGoogle Scholar
Campa, J. and Goldberg, L. (2001) Employment versus wage adjustment and the US Dollar. Review of Economics and Statistics 83 (3), 477–489.CrossRefGoogle Scholar
Campolmi, A. and Faia, E. (2010) Labor market institutions and inflation volatility in the euro area. Journal of Economic Dynamics and Control 35 (5), 793–812.CrossRefGoogle Scholar
Cole, Harald L. and Rogerson, R. (1999) Can the Mortensen–Pissarides matching model match the business cycle facts? International Economic Review 4 (4), 933–959.CrossRefGoogle Scholar
denHaan, W. Haan, W., Ramey, G., and Watson, J. (2000) Job destruction and the propagation of shocks. American Economic Review 90, 482–498.CrossRefGoogle Scholar
ECB (2002) Labour Market Mismatches in the Euro Area Countries. Policy report.Google Scholar
Elsby, M., Hobijn, B., and Sahin, A. (in press) Unemployment dynamics in the OECD. Review of Economics and Statistics.Google Scholar
Fahr, S. and Smets, F. (2010) Downward wage rigidities and optimal monetary policy in a monetary union. Scandinavian Journal of Economics 112 (4), 812–840.CrossRefGoogle Scholar
Faia, E. (2008) Optimal monetary policy rules with labour market frictions. Journal of Economic Dynamics and Control 32 (5), 1357–1720.CrossRefGoogle Scholar
Faia, E. (2009) Ramsey monetary policy with labour market frictions. Journal of Monetary Economics 56 (4), 570–581.CrossRefGoogle Scholar
Friedman, M. (1953) The Case for Flexible Exchange Rates. In Friedman's Essays in Positive Economics. Chicago: University of Chicago Press.Google Scholar
Goldberg, L. and Tracy, J. (2000) Exchange rates and local labour markets. In Feenstra, R. (ed.), Trade and Wages. NBER and University of Chicago Press.Google Scholar
Goldberg, P. and Knetter, M. (1997) Goods prices and exchange rates: What have we learned? Journal of Economic Literature 35 (3), 1243–1272.Google Scholar
Hall, Robert E. (2005) Employment fluctuations with equilibrium wage stickiness. American Economic Review 95 (1), 50–65.CrossRefGoogle Scholar
Hall, R.E. and Milgrom, P.R. (2008) The limited influence of unemployment on the wage bargain. American Economic Review 98 (4), 1653–1674.CrossRefGoogle Scholar
Helpman, E. and Itskhoki, O. (2010) Labor market rigidities, trade and unemployment. Review of Economic Studies 77 (3), 1100–1137.CrossRefGoogle Scholar
Hosios, A.J. (1990) On the efficiency of matching and related models of search and unemployment. Review of Economic Studies 57 (2), 279–98.CrossRefGoogle Scholar
Krause, M.U. and Lubik, T.A. (2007) The (ir)relevance of real wage rigidity in the New Keynesian model with search frictions. Journal of Monetary Economics 54, 706–727.CrossRefGoogle Scholar
Marston, R.C. (1990) Pricing to market in Japanese manufacturing. Journal of International Economics 29, 217–236.CrossRefGoogle Scholar
Mortensen, D. and Pissarides, C. (1999) New developments in models of search in the labor market. In Ashenfelter, Orley and Card, David (eds.), Handbook of Labor Economics, vol. 3B. Elsevier Science.Google Scholar
Moser, C., Urban, D., and di Mauro, B. Weder (2010) International competitiveness, job creation and job destruction–-An establishment-level study of German job flows. Journal of International Economics, 80 (2), 302–317.CrossRefGoogle Scholar
Mundell, R.A. (1961) A theory of optimum currency areas.American Economic Review 51, 657–665.Google Scholar
Nickell, S. and Nunziata, L. (2001) Labour Market Institutions Database.Google Scholar
Petrognolo, B. and Pissarides, C. (2001) Looking into the black box: A survey of the matching function. Journal of Economic Literature 39 (2), 390–431.Google Scholar
Revenga, A. (1992) Exporting jobs? The impact of import competition on employment and wages in US manufacturing. Quarterly Journal of Economics 107 (1), 255–284.CrossRefGoogle Scholar
Schmitt-Grohe, S. and Uribe, M. (2003) Closing small open economy models. Journal of International Economics 61, 163–185.CrossRefGoogle Scholar
Schmitt-Grohe, S. and Uribe, M. (2004) Solving dynamic general equilibrium models using a second-order approximation to the policy function. Journal of International Economics 28, 755–775.Google Scholar
Smets, F. and Wouters, R. (2003) An estimated dynamic stochastic general equilibrium model of the euro area. Journal of the European Economic Association 1 (5), 1123–1175.CrossRefGoogle Scholar