A quantitative perspective on optimal monetary policy cooperation between the US and the euro area

Frank Rafael Smets, Matthieu DARRACQ PARIES () and Stéphane Adjemian ()

No 884, Working Paper Series from European Central Bank

Abstract: The objective of this paper is to examine the main features of optimal monetary policy cooperation within a micro-founded macroeconometric framework. First, using Bayesian techniques, we estimate a two-country dynamic stochastic general equilibrium (DSGE) model for the United States (US) and the euro area (EA). The main features of the new open economy macroeconomics (NOEM) are embodied in our framework: in particular, imperfect exchange rate pass-through and incomplete financial markets internationally. Each country model incorporates the wide range of nominal and real frictions found in the closed-economy literature: staggered price and wage settings, variable capital utilization and fixed costs in production. Then, using the estimated parameters and disturbances, we study the properties of the optimal monetary policy cooperation through welfare analysis, impulse responses and variance decompositions. JEL Classification: E4, E5, F4.

Keywords: DSGE models; Optimal monetary policy; New open economy macroeconomics; Bayesian estimation. (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge, nep-eec, nep-ifn, nep-mac, nep-mon and nep-opm
Date: 2008-03
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