A simple framework for international monetary policy analysis

Richard Clarida, Jordi Galí, Mark Gertler

    Research output: Contribution to journalArticle

    Abstract

    We study the international monetary policy design problem within an optimizing two-country sticky price model, where each country faces a short run tradeoff between output and inflation. The model is sufficiently tractable to solve analytically. We find that in the Nash equilibrium, the policy problem for each central bank is isomorphic to the one it would face if it were a closed economy. Gains from cooperation arise, however, that stem from the impact of foreign economic activity on the domestic marginal cost of production. While under Nash central banks need only adjust the interest rate in response to domestic inflation, under cooperation they should respond to foreign inflation as well. In either scenario, flexible exchange rates are desirable.

    Original languageEnglish (US)
    Pages (from-to)879-904
    Number of pages26
    JournalJournal of Monetary Economics
    Volume49
    Issue number5
    DOIs
    StatePublished - 2002

    Keywords

    • Co-operation
    • International monetary policy
    • Marginal cost
    • Nash equilibrium

    ASJC Scopus subject areas

    • Finance
    • Economics and Econometrics

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