Asymmetric Shocks, Risk Sharing, and the Latter Mundell

Klaus Desmet

No 222, Working Papers from Banco de España

Abstract: This paper analyzes optimal monetary policy in a two-country model with asymmetric shocks. Agents insure against risk through the exchange of Arrow-Debreu securities. Although central banks commit to the policy that maximizes domestic welfare, this does not lead to price stability. In an attempt to improve their country’s terms of trade of securities, central banks may choose an inflationary policy rule in good states. If both central banks do so, the effects on the terms of trade wash out, leaving both countries worse off. Countries facing asymmetric shocks may therefore gain from monetary cooperation.

Keywords: asymmetric shocks; risk sharing; monetary cooperation; terms of trade; security markets (search for similar items in EconPapers)
JEL-codes: E5 F3 F42 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2002-10
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.bde.es/f/webbde/SES/Secciones/Publicaci ... o/02/Fic/dt0222e.pdf First version, October 2002 (application/pdf)

Related works:
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:bde:wpaper:0222

Access Statistics for this paper

More papers in Working Papers from Banco de España Contact information at EDIRC.
Bibliographic data for series maintained by Ángel Rodríguez. Electronic Dissemination of Information Unit. Research Department. Banco de España ().