A K% MONEY GROWTH LEADERSHIP RULE IN AN INTERNATIONAL MONETARY POLICY GAME

Dennis Jansen and Ming-Jang Weng ()

Contemporary Economic Policy, 1999, vol. 17, issue 4, 506-516

Abstract: This paper examines a version of the Friedman k%money growth rule in an open economy monetary policy game. Using the two‐country model proposed by Canzoneri and Henderson (1991), we show that, in response to asymmetric aggregate demand shocks, the Pareto‐efficient outcome can be achieved by a policy that we call a k%money growth leadership rule. Following that rule, one country, the leader, sets her money supply growth rate, and the follower sets her money supply growth rate so as to keep the sum of nominal money supply growth at k%. We show that this policy yields the same outcome as does cooperative equilibrium. We also show that alternative policy rules, such as keeping exchange‐rate adjusted money supply growth at k%, or forming a currency union, will not lead to the Pareto‐efficient outcome in response to these demand shocks. (JEL E5, F3)

Date: 1999
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