Monetary Policies in Interdependent Economies with Stochastic Disturbances: A Strategic Approach

Stephen J Turnovsky and Vasco d'Orey

No 1824, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper analyzes strategic monetary policies using a standard two country stochastic macro model. Three noncooperative equilibria, namely Cournot, Stackelberg, and Consistent Conjectural Variations, are considered.The Pareto Optimal equilibrium, where aggregate joint costs are minimizedis also considered, and all strategic equilibria are compared to the perfectly fixed and flexible exchange rate regimes. The main conclusions obtained are:(i) Demand shocks are much less problematical than supply disturbances from the viewpoint of macro stabilization; (ii) the gains from cooperation are typically small; (iii) the strategic equilibria all show substantial margins of superiority over the fixed and flexible regimes.

Date: 1986-01
Note: ITI IFM
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Published as Turnovsky, Stephen J., and Vasco d'Orey. "Monetary Policies in Interdependent Economies with Stochastic Disturbances: A Strategic Approach," Economic Journal, Vol. 96, No. 3, Sept. 1986, pp. 696-721.

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