Incomplete Exchange Rate Pass-through and International Monetary Policy Cooperation

Zhigang Huang and Jie Li

Macroeconomic Dynamics, 2023, vol. 27, issue 2, 399-431

Abstract: There is no consensus on the existence of welfare gains from international monetary policy cooperation. This study adds to the debate by providing a new open macroeconomics model with incomplete exchange rate pass-through. We find that, from a global perspective, the welfare gains from international monetary policy cooperation arise with incomplete exchange rate pass-through. Furthermore, the country’s incentive for cooperation increases with its degree of exchange rate pass-through. Cooperation benefits small countries with high pass-through; however, it is disadvantageous to large countries with low pass-through. In addition, when there is in the absence of cooperation, fixed exchange rate regime is preferred for a country suffering from monetary uncertainty, particularly for small economies with high exchange rate pass-through.

Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:cup:macdyn:v:27:y:2023:i:2:p:399-431_6

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