Cost-Push Shocks and Monetary Policy and Monetary Policy in Open Economies

Alan Sutherland (ajs10@st-and.ac.uk)

No 2002,27, Discussion Paper Series 1: Economic Studies from Deutsche Bundesbank

Abstract: This paper analyses the implications of cost-push shocks for the optimal choice of monetary policy target in an two-country sticky-price model. In addition to cost-push shocks, each country is subject to labour-supply and money-demand shocks. It is shown that the fully optimal coordinated policy can be supported by independent national monetary authorities following a policy of flexible inflation targeting. A number of simple (but non-optimal) targeting rules are compared. Strict producer-price targeting is found to be the best simple rule when the variance of cost-push shocks is small. Strict consumerprice targeting is best for intermediate levels of the variance of cost-push shocks. And nominal-income targeting is best when the variance of cost-push shocks in high. In general, money-supply targeting and fixed nominal exchange rates are found to yield less welfare than these other regimes.

Keywords: monetary policy; inflation targeting; welfare (search for similar items in EconPapers)
JEL-codes: E52 E58 F41 (search for similar items in EconPapers)
Date: 2002
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bubdp1:4192

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