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A Simple Framework for International Monetary Policy Analysis

Richard Clarida (), Jordi Gali () and Mark Gertler ()

No 8870, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study the international monetary policy design problem within an optimizing two-country sticky price model, where each country faces a short run tradeoff between output and inflation. The model is sufficiently tractable to solve analytically. We find that in the Nash equilibrium, the policy problem for each central bank is isomorphic to the one it would face if it were a closed economy. Gains from cooperation arise, however, that stem from the impact of foreign economic activity on the domestic marginal cost of production. While under Nash central banks need only adjust the interest rate in response to domestic inflation, under cooperation they should respond to foreign inflation as well. In either scenario, flexible exchange rates are desirable.

JEL-codes: E5 F3 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ifn and nep-mon
Date: 2002-04
Note: ME
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Published as Clarida, Richard, Jordi Gali and Mark Gertler. "A Simple Framework For International Monetary Policy Analysis," Journal of Monetary Economics, 2002, v49(5,Jul), 879-904.

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