Optimal monetary policy in open economies revisited

Ippei Fujiwara and Jiao Wang

No 272, Globalization Institute Working Papers from Federal Reserve Bank of Dallas

Abstract: This paper revisits optimal monetary policy in open economies, in particular, focusing on the noncooperative policy game under local currency pricing in a two-country dynamic stochastic general equilibrium model. We first derive the quadratic loss functions which noncooperative policy makers aim to minimize. Then, we show that noncooperative policy makers face extra trade-offs regarding stabilizing the real marginal costs induced by deviations from the law of one price under local currency pricing. As a result of the increased number of stabilizing objectives, welfare gains from cooperation emerge even when two countries face only technology shocks, which usually leads to equivalence between cooperation and noncooperation. Still, gains from cooperation are not large, implying that frictions other than nominal rigidities are necessary to strongly recommend cooperation as an important policy framework to increase global welfare.

JEL-codes: E52 F41 F42 (search for similar items in EconPapers)
Pages: 74 pages
Date: 2016-05-01
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac, nep-mon and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Journal Article: Optimal monetary policy in open economies revisited (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:feddgw:272

DOI: 10.24149/gwp272

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