Optimal Monetary Policy under Dollar Pricing

Konstantin Egorov () and Dmitry Mukhin
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Dmitry Mukhin: Yale University

No 1510, 2019 Meeting Papers from Society for Economic Dynamics

Abstract: The recent empirical evidence shows that most international prices are sticky in dollars. This paper studies the optimal non-cooperative monetary policy and the welfare implications of dollar pricing in a context of an open economy model with nominal rigidities. We establish the following results: 1) as in a closed economy, the optimal policy in both the U.S. and other economies stabilizes prices of local producers; 2) this policy generates asymmetric spillovers between countries such that the U.S. has a free floating exchange rate and an independent monetary policy, while other countries partially peg their exchange rates to the dollar giving rise to a “global monetary cycle”; 3) capital controls cannot insulate countries from U.S. spillovers; 4) the optimal cooperative policy is hard to implement because of the conflict of interest between countries; 5) there are potential gains from dollar pricing for the U.S., while other countries can benefit from forming a currency union such as the Eurozone.

Date: 2019
New Economics Papers: this item is included in nep-cba, nep-mon and nep-opm
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Citations: View citations in EconPapers (13)

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Persistent link: https://EconPapers.repec.org/RePEc:red:sed019:1510

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