Enrico D. Turri

This paper shows that the optimal monetary policy and exchange rate framework depend critically on the economy’s commodity exposure. We develop a flexible but tractable model economy with commodity exports and imports, in which international financial conditions may vary with the commodity cycle. Stabilizing domestic prices is optimal for commodity exporters, in line with standard open-economy policy prescriptions. But for economies that use commodities as inputs in production, optimal policy largely ‘looks through’ the direct and indirect effects of commodity shocks on domestic prices; this contrasts with some earlier findings and policy practice (which only ‘looks through’ the direct effect). Exchange-rate pegs or strict CPI inflation targeting perform better for commodity importers because they stabilize wages and employment, though neither policy is robustly optimal. In emerging and developing economies, where financial conditions are more tied to the commodity cycle, trade-offs are starker and implementing the optimal policy may be challenging, since it requires enough credibility to keep inflation expectations anchored amidst greater volatility in some nominal variables.

The secular decline in the labor share and the long-run reduction in labor supply suggest that imperfect labor markets can play a role in long-run economic growth. Unlike rising markups, rising wage markdowns are compatible with a balanced growth path featuring declining labor share and constant capital-output ratio. We introduce oligopsony and oligopoly power in a neoclassical growth model with superstar firms and an inferior sector which represents workers’ outside option. Faster TFP growth in the superstar sector with respect to the inferior sector generates an endogenously increasing markdown, the driver of growth misallocation. The model can be calibrated to simultaneously match the joint trends of GDP growth, declining labor share, and hours worked. For the US, the consumption-equivalent loss with respect to the optimal growth path is around 7.5 percent. An extension of the model with hand-to-mouth workers and capitalists delivers balanced growth with increasing inequality. While—in this context— proportional taxation distorts equilibrium labor supply, a rising minimum wage can restore efficient growth.