Optimal Monetary Policy in an Estimated Local Currency Pricing Model

Eiji Okano (), Masataka Eguchi, Hiroshi Gunji and Tomomi Miyazaki

No 558, Discussion Paper Series from Institute of Economic Research, Hitotsubashi University

Abstract: We analyze fluctuations in inflation and the nominal exchange rate under optimal monetary policy with local currency pricing by developing two-country DSGE local currency pricing and producer currency pricing models. We estimate our models using Bayesian techniques with Japanese and US data, and calculate impulse response functions. Our estimation results show that local currency pricing is strongly supported against producer currency pricing. From the estimated parameters, we show that completely stabilizing consumer price index inflation is optimal from the viewpoint of minimizing welfare costs and that completely stabilizing consumer price index inflation is consistent with completely stabilizing the nominal exchange rate.

Keywords: local currency pricing; optimal monetary policy; CPI inflation; fixed exchange rate; Bayesian estimation (search for similar items in EconPapers)
JEL-codes: E52 E62 F41 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2012-01
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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https://hermes-ir.lib.hit-u.ac.jp/hermes/ir/re/22136/DP558.pdf

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Chapter: Optimal Monetary Policy in an Estimated Local Currency Pricing Model (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:hit:hituec:558

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