Implementing Monetary Cooperation Through Inflation Targeting

Pierpaolo Benigno and Gianluca Benigno

No 3226, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This Paper presents a two-country dynamic general equilibrium model with imperfect competition and nominal price rigidities in which terms of trade shocks coexist with inefficient supply shocks. We analyse the features of the optimal cooperative solution. While terms of trade shocks should be offset by movements in the exchange rate, inefficient supply shocks are more likely to make a case for a fixed exchange rate regime. Surprisingly, we show that the optimal cooperative solution can be implemented in a strategic context through inflation-targeting regimes. Under these regimes each monetary authority weighs only domestic targets, namely GDP inflation and output gap. Even if there are gains from cooperation, inward-looking monetary policymakers can achieve the first best.

Keywords: International monetary cooperation; Monetary delegation (search for similar items in EconPapers)
JEL-codes: F33 F41 F42 (search for similar items in EconPapers)
Date: 2002-02
New Economics Papers: this item is included in nep-ifn and nep-mac
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Citations: View citations in EconPapers (40)

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