Trade, Unemployment, and Monetary Policy

68 Pages Posted: 7 Jul 2020

Multiple version iconThere are 2 versions of this paper

Date Written: July 2020


We study how trade linkages affect the conduct of monetary policy in a two-country model with heterogeneous firms, endogenous producer entry, and labor market frictions. We show that the ability of the model to replicate key empirical regularities following trade integration---synchronization of business cycles across trading partners and reallocation of market shares toward more productive firms---is central to understanding how trade costs affect monetary policy trade-offs. First, productivity gains through firm selection reduce the need of positive inflation to correct long-run distortions. As a result, lower trade costs reduce the optimal average inflation rate. Second, as stronger trade linkages increase business cycle synchronization, country-specific shocks have more global consequences. Thus, the optimal stabilization policy remains inward looking. By contrast, sub-optimal, inward-looking stabilization---for instance too narrow a focus on price stability---results in larger welfare costs when trade linkages are strong due to inefficient fluctuations in cross-country aggregate demand.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at

Suggested Citation

Cacciatore, Matteo and Ghironi, Fabio Pietro, Trade, Unemployment, and Monetary Policy (July 2020). NBER Working Paper No. w27474, Available at SSRN:

Matteo Cacciatore (Contact Author)

HEC Montreal ( email )

No Address Available

Fabio Pietro Ghironi

University of Washington ( email )

Department of Economics
Box 353330
Seattle, WA 98195-3330
United States
206-543-5795 (Phone)


Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
PlumX Metrics