The Role of Financial Market Structure and the Trade Elasticity for Monetary Policy in Open Economies

Katrin Rabitsch

Journal of Money, Credit and Banking, 2012, vol. 44, issue 4, 603-629

Abstract: Imperfect international risk sharing and exchange rate volatility matter for how monetary policy should optimally be conducted in an open economy through affecting policymakers’ terms of trade considerations. I study these motives for a classical and long‐standing question in international monetary economics: the size of potential gains from international policy coordination. In a relatively standard model I allow for various degrees of risk sharing by considering different assumptions on international financial markets, and a large region for the crucial parameter of the trade elasticity. When incomplete markets give rise to high volatility of international prices and poor risk sharing—such as in Corsetti, Dedola, and Leduc (2008)—gains from policy coordination are an order of magnitude larger than previous studies, working under the assumptions of complete markets, suggest.

Date: 2012
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https://doi.org/10.1111/j.1538-4616.2012.00503.x

Related works:
Journal Article: The Role of Financial Market Structure and the Trade Elasticity for Monetary Policy in Open Economies (2012)
Working Paper: The role of financial market structure and the trade elasticity for monetary policy in open economies (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:wly:jmoncb:v:44:y:2012:i:4:p:603-629

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