2 - Monetary policy and competition policy in a two-country, two-sector model

Wetenschappelijke publicatie
Date 1 March 2001

This paper introduces different degrees of product market competition into Obsfeld and Rogoff's inter temporal monetary model. Competition is allowed to vary across sectors and countries. Contray to Obstfeld-Rogoff (1995), money retrains its log-run non-neutrality property when non-tradables are included and exchange rate overshooting takes place even under unitary elasticity of money demand. I find a modified version of the 'exchange rate magnification effect' stressed by Hau (2000). Furthermore, the competition parameter is interpreted as a policy instrument. This enables me to study competition enhancement in the European services sector and its implications for monetary policy. It is shown that, under certain conditions, enhanced competition can have an upward impact on the general price level.