Working Papers
Deviations from the LOP with labour and goods market frictions, 2021Â
In this paper, I explore how a country-specific productivity shock generates deviations of the law of one price (LOP) in an open economy by introducing search frictions in labour and goods markets. First, I express the LOP gap by the ratio of marginal utility of aggregate search efforts across countries. Then I show that the LOP gap is expressed in terms of relative aggregate consumption across countries by examining the relationship between the aggregate search efforts and the aggregate consumption. I find that a country-specific productivity shock generates deviations of LOP through the link between aggregate consumption and aggregate productivity. If a country-specific productivity shock occurs in the home country, then households in the home country exert more search efforts to consume more goods, which entails the difference of matching probabilities of firms between the domestic and the export markets. Since aggregate productivity and marginal costs of posting vacancies are the same across markets, difference in matching probabilities between markets let firms operating in each market offer different prices.
Optimal monetary policy in the open economy with labour market frictions, 2019
The paper examines a Ramsey-type optimal monetary policy in an open economy with a two-country dynamic general equilibrium model where search and matching frictions exist in labour markets along with the limited participation in financial markets. Monetary policy affects the decision of firms in labour markets because firms finance their wage bills with loans from domestic financial intermediaries in advance. There are two main results associated with optimal monetary policy. The long-run optimal nominal interest rate is zero suggesting deflation because the terms of trade effect on consumption is weaker by search and matching frictions in the labour market. As a result of the Ramsey optimal monetary policy, dynamics of business cycles in both countries show similar patterns in response to productivity shocks and, in turn, higher cross-country correlations of real variables.
The role of wage rigidity with matching frictions on the international co-movement of employment, 2018
This paper addresses the international co-movement of employment by introducing labour market search frictions along with real wage rigidity into a two-country economy. I show that search and matching frictions in the labour market, combined with wage rigidity account for the positive cross-country correlation of employment as well as labour market activity within a country. With search and matching frictions in the labour market, higher productivity in the home country leads home and foreign employment to rise even at the initial period before productivity shocks spill over. When demand for foreign goods is predicted to rise, foreign firms have an incentive to hire workers in advance in response to the higher expected payoff to a job because hiring takes time and costs.