Labor immobility and the transmission mechanism of monetary policy in a monetary union |
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| Affiliation: | 1. Banco de Portugal, Portugal;2. Católica-Lisbon SBE, Portugal;3. CEPR, United Kingdom;1. University of Bern, World Trade Institute, Hallerstrasse 6, 3012 Bern, Switzerland;2. Department of Economics, University of California, Davis, One Shields Avenue, Davis, CA, 95616, United States;3. NBER, United States;1. Institute of Multidisciplinary Research for Advanced Materials (IMRAM), Tohoku University, Sendai 980-8577, Japan;2. Advanced Materials Engineering Div., Toyota Motor Corporation, Shizuoka 410-1193, Japan |
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| Abstract: | It is believed that a common monetary policy in a monetary union will have identical effects on different countries as long as these countries have identical fundamentals. We show that, when there is specialization in production, the terms of trade react to the shock. The transmission mechanism of a monetary shock has in this case an additional channel, the terms of trade. This is the case even if state contingent assets can be traded across countries. For a reasonable parametrization, the differential on the transmission across countries is quantitatively significant when compared with the effect on the union's aggregates. Monetary shocks create cycles with higher volatility in “poor” countries than in “richer” ones. |
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| Keywords: | Monetary union Transmission mechanism of monetary policy Labor immobility Idiosyncratic effects |
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