Optimal Monetary Policy in an Estimated Local Currency Pricing Model

Eiji Okano (), Masataka Eguchi, Hiroshi Gunji and Tomomi Miyazaki

A chapter in DSGE Models in Macroeconomics: Estimation, Evaluation, and New Developments, 2012, pp 39-79 from Emerald Group Publishing Limited

Abstract: We analyze fluctuations in inflation and the nominal exchange rate under optimal monetary policy with local currency pricing by developing two-country DSGE local currency pricing and producer currency pricing models. We estimate our models using Bayesian techniques with Japanese and US data, and calculate impulse response functions. Our estimation results show that local currency pricing is strongly supported against producer currency pricing. From the estimated parameters, we show that completely stabilizing consumer price index inflation is optimal from the viewpoint of minimizing welfare costs and that completely stabilizing consumer price index inflation is consistent with completely stabilizing the nominal exchange rate.

Keywords: Local currency pricing; optimal monetary policy; CPI inflation; fixed exchange rate; Bayesian estimation (search for similar items in EconPapers)
Date: 2012
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Persistent link: https://EconPapers.repec.org/RePEc:eme:aecozz:s0731-9053(2012)0000028005

DOI: 10.1108/S0731-9053(2012)0000028005

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