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  3. American Economic Journal: Macroeconomics
  4. April 2022
  5. Optimal Currency Areas with Labor Market Frictions

Optimal Currency Areas with Labor Market Frictions

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Abstract

I study efficiency and optimal monetary policy in a two-country monetary union with frictional labor markets. With heterogeneity in labor market frictions, the constrained efficient allocation generically cannot be achieved even if productivity shocks affecting each country are the same. The second-best optimal policy targets smaller inflation and output gaps in the more sclerotic labor market. A quantitative calibration to the eurozone implies welfare gains from redefining the union's inflation target to put more weight on its sclerotic members.

Citation

Kekre, Rohan. 2022. "Optimal Currency Areas with Labor Market Frictions." American Economic Journal: Macroeconomics, 14 (2): 44-95. DOI: 10.1257/mac.20190002

Additional Materials

JEL Classification

  • E23 Macroeconomics: Production
  • E24 Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
  • E31 Price Level; Inflation; Deflation
  • E52 Monetary Policy
  • F33 International Monetary Arrangements and Institutions
  • F45 Macroeconomic Issues of Monetary Unions
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