International Monetary Policy Coordination and Competitive Depreciation: A Re-EvaluationMichael B. Devereux () and Caroline Marie Betts UBC Departmental Archives from UBC Department of Economics Abstract: Is there a need for international coordination of monetary policies within the current system of floating exchange rates? In a recent paper, Obstfeld and Rogo (1995) argue that in an environment of sticky prices, and floating exchange rates, monetary policy shocks will generate positive welfare spillovers across countries. This leads to the conclusion that international monetary policy coordination is unnecessary, and may in fact be undesirable, since it nurtures a bias towards high inflation. The present paper shows that these conclusions are dependent on the manner in which prices are set. When firms engage in 'pricing-to-market' (PTM), setting prices in the currency of the buyer, monetary policy tends to have negative welfare spillovers. This gives an incentive to engage in 'competitive depreciation'. In a noncooperative equilibrium, world inflation will be higher, the greater the importance of PTM. With a high degree of PTM, the case for international monetary policy coordination is restored. If PTM is at an intermediate range, however, international monetary coordination may have no consequences at all. Keywords: PRICING; EXCHANGE RATE; INTERNATIONAL MONETARY POLICY (search for similar items in EconPapers) There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it. Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: http://EconPapers.repec.org/RePEc:ubc:bricol:99-07 Access Statistics for this paper More papers in UBC Departmental Archives from UBC Department of Economics |
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