Financial Market Integration, Costs of Adjusting Hours Worked and Monetary Policy

Abstract

Based on a dynamic stochastic general equilibrium model featuring a labour‐market friction in the form of costs of adjusting hours, we analyse how financial market integration affects the propagation of monetary policy in an open economy. The main result of our analysis is that costs of adjusting hours worked substantially dampen the increase in the effect of monetary policy on output and hours worked brought about by financial market integration.