Optimal policy under dollar pricing

Konstantin Egorov and Dmitry Mukhin

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Empirical evidence shows that most international prices are sticky in dollars. This paper studies the policy implications of this fact in the context of an open economy model with general preferences, technologies, asset markets, nominal rigidities, and a rich set of shocks. We show that although monetary policy is less efficient and cannot implement the flexible-price allocation, inflation targeting and a floating exchange rate remain robustly optimal in non-US economies. The capital controls cannot unilaterally improve the allocation and are useful only when coordinated across countries. International cooperation benefits other economies, but is not in the self-interest of the United States.

JEL-codes: E31 E52 F14 F31 F41 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2023-07-01
New Economics Papers: this item is included in nep-cba, nep-mon and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Published in American Economic Review, 1, July, 2023, 113(7), pp. 1783 - 1824. ISSN: 0002-8282

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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:118585

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