Optimal Monetary Policy in a Two Country Model with Firm-Level Heterogeneity

This paper studies non-cooperative monetary policy in a two country general equilibrium model where international economic integration is endogenised through firm-level heterogeneity and monopolistic competition. Economic integration between countries is a source of policy competition, generating higher long-run inflation, and increased gains from monetary cooperation. JEL codes: E31, E52, F41 * Dudley Cooke, Department of Economics, University of Exeter, Streatham Court, Rennes Drive, Exeter EX4 4PU, United Kingdom. 44-0-1392-726257. [email protected]. I thank the Research Department of the Bank of Portugal for financial support. The views in this paper are those of the author and do not necessarily reflect the views of the Federal Reserve Bank of Dallas or the Federal Reserve System.