Optimal monetary policy cooperation with a global shock and dollar standard

Xiaoyong Cui (), Liutang Gong, Chan Wang and Heng-Fu Zou ()
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Xiaoyong Cui: School of Economics, Peking University

No 612, CEMA Working Papers from China Economics and Management Academy, Central University of Finance and Economics

Abstract: Contrary to the consensus in the literature, we demonstrate that there exist the welfare gains from monetary policy cooperation when the world is hit by a global shock. We reach our conclusion in a two-country New Keynesian model with a global oil price shock and dollar standard. When exporters in both countries and oil producer which is modeled as a third party such as OPEC price goods in the home currency, the U.S. dollar, the status of home and foreign monetary policy is asymmetric. Speciffically, home monetary policy can influence the welfare levels of the households in the world while foreign monetary policy can only affect the welfare level of the domestic household. By internalizing the negative externality of home monetary policy to foreign country, world planner can achieve the welfare gains from monetary policy cooperation. In addition, unlike what is found in the literature, we show that not all countries are willing to take part in monetary policy cooperation, unless the world planner transfers part of the welfare gains from the country which benefits from the monetary policy cooperation to the one which loses.

Keywords: A global shock; Dollar standard; Monetary policy cooperation; Welfare gains (search for similar items in EconPapers)
JEL-codes: E5 F3 F4 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2020
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac, nep-mon and nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:cuf:wpaper:612

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