The Feasibility of Coordinating International Monetary Policy Strategies in the Context of Asymmetric Demand Shocks

Leonid Serkov, Sergey Krasnykh, Julia Dubrovskaya and Elena Kozonogova ()
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Leonid Serkov: Centre for the Development and Location of Productive Forces, Institute of Economics of the Ural Branch of the Russian Academy of Sciences, Ekaterinburg 620014, Russia
Sergey Krasnykh: Laboratory of Modelling of Spatial Development of Territories, Institute of Economics of the Ural Branch of the Russian Academy of Sciences, Ekaterinburg 620014, Russia
Julia Dubrovskaya: Department of Economics and Finance, Perm National Research Polytechnic University, Komsomolsky Ave., 29, Perm 614000, Russia
Elena Kozonogova: Department of Economics and Finance, Perm National Research Polytechnic University, Komsomolsky Ave., 29, Perm 614000, Russia

JRFM, 2024, vol. 17, issue 7, 1-13

Abstract: In the context of the increasing interdependence of countries due to the development of international trade, a relevant question arises as to whether it is necessary to conduct independent monetary policies for each country or whether it is advisable to coordinate these policies. This question becomes a key in the debate on optimal monetary policy strategies in open economies. The aim of this study is to analyze the impact of asymmetric aggregate demand shocks on the appropriateness of monetary policy coordination in a simple stochastic model of two interacting countries. The analysis of equilibrium states of the monetary authorities’ interaction strategies under study was carried out analytically by minimizing the loss function and solving one-period static optimization problems. The equilibrium states of macroeconomics of interacting countries under coordination of monetary policy and in cases of lack of coordination (Nash and Stackelberg equilibrium) in the presence of asymmetric, serially uncorrelated demand shocks have been analyzed. It is proven that the response of inflation to asymmetric demand shocks is smaller in the case of coordinated policy than in the case of non-cooperative policy. The loss function analysis shows that the compensation of demand shocks is found to be more costly in Nash equilibrium than in the case of monetary authority coordination policy. The analysis of the monetary authorities’ interaction strategies showed that the real exchange rate plays an important role in balancing supply and demand in the two economies.

Keywords: coordination policy; Nash equilibrium; real exchange rate; asymmetric shocks; inflation rate; aggregate demand; aggregate output; loss function (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2024
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