TY - JOUR
T1 - A simple framework for international monetary policy analysis
AU - Clarida, Richard
AU - Galí, Jordi
AU - Gertler, Mark
N1 - Funding Information:
Prepared for the Fall 2001 Carnegie-Rochester Conference. Thanks to Ed Nelson, Ben McCallum, and Antonella Trigari for helpful comments. Galı́ and Gertler gratefully acknowledge the support of the NSF, the C.V. Starr Center for Applied Economics, and CREI.
PY - 2002
Y1 - 2002
N2 - 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.
AB - 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.
KW - Co-operation
KW - International monetary policy
KW - Marginal cost
KW - Nash equilibrium
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U2 - 10.1016/S0304-3932(02)00128-9
DO - 10.1016/S0304-3932(02)00128-9
M3 - Article
AN - SCOPUS:0036339136
SN - 0304-3932
VL - 49
SP - 879
EP - 904
JO - Journal of Monetary Economics
JF - Journal of Monetary Economics
IS - 5
ER -