International Dimensions of Optimal Monetary Policy

Giancarlo Corsetti and Paolo Pesenti

No 8230, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper provides a baseline general-equilibrium model of optimal monetary policy among interdependent economies, with monopolistic firms that set prices one period in advance. Strict adherence to inward-looking policy objectives such as the stabilization of domestic output cannot be optimal when firms' markups are exposed to currency fluctuations. Such policies induce excessive volatility in exchange rates and foreign sales revenue, leading exporters to set higher prices in response to higher profit risk. In general, optimal rules trade off a larger domestic output gap against lower import prices. Monetary rules in a world Nash equilibrium lead to smaller exchange rate volatility relative to both inward-looking rules and discretionary policies, even when the latter do not suffer from any inflationary (or deflationary) bias. Gains from international monetary cooperation are related in a non-monotonic way to the degree of exchange rate pass-through.

JEL-codes: E31 E52 (search for similar items in EconPapers)
Date: 2001-04
New Economics Papers: this item is included in nep-ifn and nep-mon
Note: IFM
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Citations: View citations in EconPapers (123)

Published as Corsetti, Giancarlo & Pesenti, Paolo, 2005. "International dimensions of optimal monetary policy," Journal of Monetary Economics, Elsevier, vol. 52(2), pages 281-305, March.

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Journal Article: International dimensions of optimal monetary policy (2005)
Working Paper: International Dimensions of Optimal Monetary Policy (2002)
Working Paper: International dimensions of optimal monetary policy (2001)
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