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 declines in the labor share and labor supply suggest that imperfect labor markets matter for long-run growth. We show that, unlike rising markups, rising wage markdowns are consistent with balanced growth featuring a declining labor share and a constant capital-output ratio. We propose and solve a model that generates both trends. Our model embeds oligopsony and oligopoly in neoclassical growth, with superstar firms and an inferior sector providing workers’ outside option. Faster superstar-sector TFP growth delivers endogenously rising markdowns. Calibrating the model to post-2000 US data, where the labor share and hours per worker fall as measured markdowns rise, we find a consumption-equivalent loss of 12–15 percent relative to optimal growth. The markdown growth estimated in existing studies implies that rising monopsony accounts for approximately one third of the post-2000 decline in the US labor share and one half of the decline in hours per worker. An extension with hand-to-mouth workers and capitalists generates balanced growth with increasing inequality. In this economy a growing minimum wage can restore efficient growth, while transfers to workers cannot.