Price-level instability and international monetary policy coordination

Nguyen Hong Thang ()
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Nguyen Hong Thang: Faculty of Banking, Banking Academy of Vietnam, 12 Chua Boc Street, Dong Da district, Hanoi, Vietnam

The B.E. Journal of Macroeconomics, 2015, vol. 15, issue 1, 309-337

Abstract: In a two-country open economy model, Bencivenga, Huybens, and Smith [2002, What to Stabilize in the Open Economy, International Economic Review 43, 1289–1307] investigate three policy regimes and find that a fixed exchange rate regime, where the country with the lowest reserve-to-deposit ratio is charged with maintaining the fixed rate, and a price-level targeting regime are both more prone to price-level instability than a constant money growth rate regime. This paper, by replacing their “helicopter drops” assumption with an open market operations assumption, shows that the two rules of fixing the money growth rate and targeting the time path of the price level work equally well. Additionally, under a regime of fixed exchange rates, it does not matter which country is charged with keeping the fixed exchange rate.

Keywords: open economy; policy interaction; price indeterminacy (search for similar items in EconPapers)
JEL-codes: E52 E61 F42 H50 (search for similar items in EconPapers)
Date: 2015
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DOI: 10.1515/bejm-2013-0031

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