Monetary policy during unbalanced global recoveries

Luca Fornaro and Federica Romei

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: We study optimal monetary policy during times of exceptionally high global demand for tradable goods, relative to non-tradable ones. The optimal monetary response entails a rise in inflation, which helps rebalance production towards the tradable sector. While the inflation costs are fully bore domestically, however, the gains in terms of higher supply of tradable goods partly spill over to the rest of the world. National central banks may thus fall into a coordination trap, and implement an excessively tight monetary policy causing an unnecessarily sharp global contraction.

Keywords: Asymmetric shocks; reallocation; monetary policy; international monetary cooperation; inflation; global supply shortages (search for similar items in EconPapers)
JEL-codes: E32 E44 E52 F41 F42 (search for similar items in EconPapers)
Date: 2022-01
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-his, nep-mac, nep-mon and nep-opm
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Citations: View citations in EconPapers (13)

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Working Paper: Monetary Policy during Unbalanced Global Recoveries (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:upf:upfgen:1814

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