Specific Factors and International Monetary Policy Coordination.

The consequences of intersectoral factor immobility for optimal monetary policy are examined in a 'New Open Economy Macroeconomics' framework. When labor cannot be reallocated between tradable and nontradable goods production, this rigidity generates a welfare loss, which increases as the sectors become more different. When prices are predetermined, the model becomes a monetary 'specific factor' model. Intersectoral factor immobility complicates the optimal monetary policy problem by creating a tradeoff between stabilizing tradable and nontradable sector labor. When labor is mobile between sectors, policy coordination can significantly reduce labor volatility. When it is not mobile, coordination results in less volatility in tradable sector labor, but increased nontradable sector labor volatility. [ABSTRACT FROM AUTHOR]