Faculty of Economics and Business Administration Publications Database

Strategic monetary policy in interdependent economies: Gains from coordination reconsidered

Volume: 32
Pages: 360 - 376
Month: February
ISSN-Print: 0261-5606
Link External Source: Online Version
Year: 2013
Keywords: Optimal short-run monetary policy; International policy coordination; New Open Economy Macroeconomics

There is a wide acceptance that gains to international monetary policy coordination are small at best and that the need of policy coordination is questionable. This conclusion, however, follows from the underlying presumption that monetary policy is concerned with the stabilization of macroeconomic fluctuations only. This paper presents a general short-run monetary policy analysis within a familiar two-country New Open Economy Macroeconomics (NOEM) framework where national monetary policy involves the choice of a deterministic growth trend of money supply (average inflation rate) and stochastic, state-dependent deviations of actual money supply from the deterministic trend (stabilization). Strategic “beggar-thy-neighbor” considerations induce the deviation of both policy choices from their socially optimal values. The gains from international coordination of the average inflation rate are of first-order and hence larger than the gains from the coordination of the stabilization policies which are of second-order.