Gains from international monetary policy coordination: Does it pay to be different?

Zheng Liu, Evi Pappa

Research output: Contribution to journalArticleResearchpeer-review

19 Citations (Scopus)

Abstract

In a two country world where each country has a traded and a non-traded sector and each sector has sticky prices, optimal independent policy in general cannot replicate the natural-rate allocations. There are potential welfare gains from coordination since the planner under a cooperating regime internalizes a terms-of-trade externality that independent policymakers overlook. If the countries have symmetric trading structures, however, the gains from coordination are quantitatively small. With asymmetric trading structures, the gains can be sizable since, in addition to internalizing the terms-of-trade externality, the planner optimally engineers a terms-of-trade bias that favors the country with a larger traded sector. © 2007 Elsevier B.V. All rights reserved.
Original languageEnglish
Pages (from-to)2085-2117
JournalJournal of Economic Dynamics and Control
Volume32
Issue number7
DOIs
Publication statusPublished - 1 Jul 2008

Keywords

  • Asymmetric structures
  • International policy coordination
  • Optimal monetary policy
  • Terms-of-trade bias

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