The Global Financial Cycle and International Monetary Policy Cooperation

Shangshang Li

No 199, FIW Working Paper series from FIW

Abstract: This paper evaluates gains from international monetary policy cooperation between the financial center and periphery countries in a two-country open economy model consistent with global financial cycles. Compared to the non-cooperative Nash equilibrium, the optimal cooperative equilibrium robustly fails to benefit both countries simultaneously. The financial periphery is more likely to gain from cooperation if it raises less foreign currency debt or is relatively small. These results also hold when considering the transitional gains and losses of moving from non-cooperation to cooperation. The uneven distribution of gains from cooperation persists when both countries adopt implementable policy rules with and without cooperation. Nevertheless, both countries gain when transitioning from the Nash to the cooperative implementable rules. Regardless of the financial center's policy, rules responding to the exchange rate dominate over purely inward-looking rules for the financial periphery.

Keywords: policy cooperation; global financial cycle; currency mismatch (search for similar items in EconPapers)
JEL-codes: E44 E52 E58 E61 F34 F42 (search for similar items in EconPapers)
Date: 2024-07
New Economics Papers: this item is included in nep-ban, nep-dge, nep-gth, nep-ifn, nep-mon and nep-opm
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