Trade, unemployment, and monetary policy

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. show that ability to replicate key empirical regularities following integration—synchronization business cycles across trading partners reallocation shares toward more productive firms—is central understanding costs trade-offs. First, productivity gains through firm selection reduce need for positive inflation correct long-run distortions. As result, lower optimal average rate. Second, as stronger increase cycle synchronization, country-specific shocks have global consequences. Thus, stabilization remains inward looking. By contrast, sub-optimal, inward-looking stabilization—for instance too narrow focus on price stability—results larger welfare when are strong due inefficient fluctuations cross-country aggregate demand.