Price and Trade Effects of Exchange Rate Fluctuations and the Design of Policy Coordinaton

Daniel Cohen and Charles Wyplosz

No 440, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We analyze a two-country zone facing a joint inflationary shock and responding with coordinated and uncoordinated monetary and fiscal policies. We show that the standard presumption that the absence of coordination results in an excessive exchange rate appreciation of the zone with respect to the rest of the world hinges on a specific assumption: that within the two countries considered, the price effect of exchange rate fluctuations dominates the trade effects relatively to the corresponding effects vis-a-vis the rest of the world. If the relative hierarchy goes the other way around (as we argue is likely for EC countries), the standard conclusion is reversed, resulting in insufficiently active monetary and fiscal policies. The paper considers asymmetric shocks as well as monetary policy coordination.

Keywords: Exchange Rates; Fiscal Policy; Monetary Policy; Policy Coordination; Trade Model (search for similar items in EconPapers)
JEL-codes: E63 F11 F31 (search for similar items in EconPapers)
Date: 1990-08
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Related works:
Journal Article: Price and trade effects of exchange rate fluctuations and the design of policy coordination (1995)
Working Paper: Price and trade effects of exchange rates fluctuations and the design of policy coordination (1990)
Working Paper: Price and Trade Effects of Exchange Rates Fluctuations and the Design of Policy Coordination (1990)
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