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 23, 2019

The Macroeconomics of the Greek Depression

Rohan Kekre, Gabriel Chodorow-Reich, Loukas Karabarbounis
Topics:  Tax & Budget
BFI Working Paper Jan 16, 2020

Monetary Policy, Redistribution, and Risk Premia

Rohan Kekre, Moritz Lenel
Topics:  Monetary Policy, Financial Markets