This paper provides a baseline general-equilibrium model of optimal monetary policy among interdependent economies with monopolistic firms that set prices one period in advance. Strict adherence to inward-looking policy objectives such as the stabilization of domestic output cannot be optimal when firms' markups are exposed to currency ­fluctuations. Such policies induce excessive volatility in exchange rates and foreign sales revenue, leading exporters to set higher prices in response to higher profit risk. In general, optimal rules trade off a larger domestic output gap against lower import prices. Monetary rules in a world Nash equilibrium lead to less exchange rate volatility relative to both inward-looking rules and discretionary policies, even when the latter do not suffer from any in­flationary (or deflationary) bias. Gains from international monetary cooperation are related in a non- monotonic way to the degree of exchange rate pass-through.

Corsetti, G., Pesenti, P. (2005). International Dimensions of Optimal Monetary Policy. JOURNAL OF MONETARY ECONOMICS, 52(2), 281-305 [10.1016/j.jmoneco.2004.06.00].

International Dimensions of Optimal Monetary Policy

CORSETTI, Giancarlo;
2005-01-01

Abstract

This paper provides a baseline general-equilibrium model of optimal monetary policy among interdependent economies with monopolistic firms that set prices one period in advance. Strict adherence to inward-looking policy objectives such as the stabilization of domestic output cannot be optimal when firms' markups are exposed to currency ­fluctuations. Such policies induce excessive volatility in exchange rates and foreign sales revenue, leading exporters to set higher prices in response to higher profit risk. In general, optimal rules trade off a larger domestic output gap against lower import prices. Monetary rules in a world Nash equilibrium lead to less exchange rate volatility relative to both inward-looking rules and discretionary policies, even when the latter do not suffer from any in­flationary (or deflationary) bias. Gains from international monetary cooperation are related in a non- monotonic way to the degree of exchange rate pass-through.
2005
Corsetti, G., Pesenti, P. (2005). International Dimensions of Optimal Monetary Policy. JOURNAL OF MONETARY ECONOMICS, 52(2), 281-305 [10.1016/j.jmoneco.2004.06.00].
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11590/131365
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