International Policy Coordination and Simple Monetary Policy Rules

Wolfram Berger

Swiss Journal of Economics and Statistics (SJES), 2010, vol. 146, issue II, 451-479

Abstract: This paper studies monetary policy in an optimizing two-country model. We suppose a two-step production process that is associated with vertical trade. Prices of final consumption goods are sticky and pass-through can be incomplete. Monetary authorities should respond to both home and foreign shocks in this set-up. Which simple, i.e. non-optimal, targeting rule best supports the welfare maximizing policy hinges critically on the degree of the cross-country interdependence in production and the relative importance of productivity and cost-push shocks. We argue that the relative volatility of productivity and cost-push shocks determines whether the monetary authority should follow a price targeting rule whereas the degree of vertical integration determines which simple price targeting rule (producer or consumer price index targeting) is best.

Keywords: policy coordination; policy rule; consumer price targeting; producer price targeting; monetary targeting (search for similar items in EconPapers)
JEL-codes: E52 E58 F41 F42 (search for similar items in EconPapers)
Date: 2010
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Persistent link: https://EconPapers.repec.org/RePEc:ses:arsjes:2010-ii-2

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