When Does Coordination Pay?

Marcus Miller and Mark Salmon

No 425, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: In a continuous time model of two symmetric open economies, with a floating exchange rate, we find that the pay-off to the policy coordination depends systematically on the heterogeneity of their inflation experience. While monetary policy coordination improves welfare when there is a common rate of underlying inflation, it exacerbates the `time-consistency' problem arising when there are differences. Since the principle of `certainty equivalence' applies to time-consistent policy in linear quadratic models, we are also able to give a stochastic interpretation of the deterministic results.

Keywords: Certainty Equivalence; Floating Exchange Rates; Policy Coordination; Time Consistency (search for similar items in EconPapers)
Date: 1990-07
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Related works:
Journal Article: When does coordination pay? (1990)
Working Paper: WHEN DOES COORDINATION PAY? (1989)
Working Paper: WHEN DOES COORDINATION PAY? (1989)
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