Currency Misalignments and Optimal Monetary Policy: A Reexamination

Charles Engel

American Economic Review, 2011, vol. 101, issue 6, 2796-2822

Abstract: This paper examines optimal monetary policy in an open-economy two-country world with sticky prices under pricing to market. We show that currency misalignments are inefficient and lower world welfare. We find that optimal policy must target consumer price inflation, the output gap, and the currency misalignment. The paper derives the loss function of a cooperative monetary policymaker and the optimal targeting rules. The model is a modified version of Clarida, Gali, and Gertler (JME, 2002). The key change is that we allow pricing to market or local-currency pricing and consider the policy implications of currency misalignments. (JEL E52, F31, F41)

Date: 2011
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Working Paper: Currency Misalignments and Optimal Monetary Policy: A Reexamination (2009)
Working Paper: Currency Misalignments and Optimal Monetary Policy: A Re-examination (2009)
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