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The role of intermediate goods in international monetary cooperation

Tian Xia

Journal of International Money and Finance, 2020, vol. 100, issue C

Abstract: This paper investigates the implications of intermediate goods for optimal monetary policy in open economies, and particularly focuses on the welfare gains that result from monetary cooperation. In a relatively standard two-country dynamic stochastic general equilibrium model with input-output relations, this paper demonstrates that introducing intermediate goods can amplify the welfare gains caused by cost-push shocks by an order of magnitude larger. A detailed analysis of equilibrium dynamics highlights a new channel that is absent in the previous literature: non-cooperative central banks respond differently to shocks in the intermediate goods market versus shocks in the final goods market, even if these shocks generate the same distortions when the two central banks cooperate. Furthermore, it is demonstrated that increasing the degree of openness in the intermediate goods market can reduce the welfare gains from monetary cooperation. This casts doubt on whether the recent trend in international economic integration justifies the potential need for international monetary cooperation.

Keywords: Optimal monetary policy; Policy cooperation; Openness; Input-output interactions (search for similar items in EconPapers)
JEL-codes: E52 F41 F42 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:100:y:2020:i:c:s0261560619302116

DOI: 10.1016/j.jimonfin.2019.102094

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