The role of financial market structure and the trade elasticity for monetary policy in open economies

Katrin Rabitsch

No 2010/5, MNB Working Papers from Magyar Nemzeti Bank (Central Bank of Hungary)

Abstract: The degree of international risk sharing matters for how monetary policy should optimally be conducted in an open economy. This is because risk sharing affects the way in which monetary policy is affected by terms of trade considerations. In a standard two-country model with monopolistic competition and nominal rigidities I consider different assumptions on international financial markets – complete markets, financial autarky and a bond economy – and a large region for the crucial parameter of the trade elasticity. There are three main results: one, the prescription of (producer) price stability as the optimal policy is obtained only as a special case, while in general it is optimal to deviate from a strictly zero inflation rate. Two, while gains from international policy coordination are generally small, they become potentially substantial when international risk sharing is poor and wealth effects from shocks across countries are large. And, three, when international financial markets are incomplete, there are also (sometimes considerable) gains over the flexible price allocation achievable.

Keywords: monetary policy; risk sharing; price stability; policy coordination; financial market structure; trade elasticity (search for similar items in EconPapers)
JEL-codes: E52 E58 F42 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2010
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Related works:
Journal Article: The Role of Financial Market Structure and the Trade Elasticity for Monetary Policy in Open Economies (2012)
Journal Article: The Role of Financial Market Structure and the Trade Elasticity for Monetary Policy in Open Economies (2012)
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