Financial Stability in Open Economies

Ippei Fujiwara and Yuki Teranishi

No 09-E-09, IMES Discussion Paper Series from Institute for Monetary and Economic Studies, Bank of Japan

Abstract: This paper investigates the implications for monetary policy of financial markets that are internationally integrated but have intrinsic frictions. When there is no other distortion than financial market imperfections in the form of staggered international loan contracts, financial stability, which here constitutes eliminating the inefficient fluctuations of loan premiums, is the optimal monetary policy in open economies, regardless of whether policy coordination is possible. Yet, the optimality of inward-looking monetary policy requires an extra condition, in addition to those included in previous studies on the optimal monetary policy in open economies. To make allocations between cooperative and noncooperative monetary policy coincide, the exchange rate risk must be perfectly covered by the banks. Otherwise, each central bank has an additional incentive to control the nominal exchange rate to favor firms in her own country by reducing the exchange rate risk.

Keywords: optimal monetary policy; policy coordination; global banking; international staggered loan contracts (search for similar items in EconPapers)
JEL-codes: E50 F41 (search for similar items in EconPapers)
Date: 2009-03
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
http://www.imes.boj.or.jp/research/papers/english/09-E-09.pdf (application/pdf)

Related works:
Working Paper: Financial stability in open economies (2013)
Working Paper: Financial Stability in Open Economies (2013)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ime:imedps:09-e-09

Access Statistics for this paper

More papers in IMES Discussion Paper Series from Institute for Monetary and Economic Studies, Bank of Japan Contact information at EDIRC.
Bibliographic data for series maintained by Kinken ().