Research / BFI Working PaperFeb 20, 2020

Optimal Currency Areas with Labor Market Frictions

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 in 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.

More Research From These Scholars

BFI Working Paper May 24, 2021

Monetary Policy, Redistribution, and Risk Premia

Rohan Kekre, Moritz Lenel
Topics:  Monetary Policy, Financial Markets
BFI Working Paper Sep 7, 2021

The Flight to Safety and International Risk Sharing

Rohan Kekre, Moritz Lenel
Topics:  Monetary Policy
BFI Working Paper Jun 18, 2021

The Macroeconomics of the Greek Depression

Rohan Kekre, Gabriel Chodorow-Reich, Loukas Karabarbounis
Topics:  Tax & Budget