Cooperative Design for Central Banks versus Cooperative Implementation of Monetary Policy

Juan Negrete

Review of International Economics, 2000, vol. 8, issue 2, 252-260

Abstract: The game‐theoretic literature on monetary policy in open economies has traditionally concluded that central banks should implement monetary policy in a cooperative fashion. This paper considers an alternative mechanism for internalizing the external effects: in the first stage, governments cooperatively design central banks’ objective functions; in the second stage, central banks implement monetary policy without cooperation. Although this regime lacks flexibility to deal with asymmetric shocks, it presents important advantages in relation to the former scenario: first, it enjoys more credibility; second, it entails lower coordination and information costs; and finally, it hampers unilateral manipulation of central banks’ objectives.

Date: 2000
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