Template-Type: ReDIF-Paper 1.0
Title: Optimal Monetary Policy in an Interdependent World
Author-Name: Michael Evers
Author-Email: mevers@uni-bonn.de
Classification-JEL: F41, F42
Keywords: International Policy Coordination, General Short-Run Monetary Policy, New Open Economy Macroeconomics
Abstract: In the literature on international monetary policy, the paradigm is that
	gains from coordination are fairly small. Monetary policy is conducted to
	stabilize macroeconomic fluctuations and gains from policy coordination arise
	from preventing national monetary authorities from strategically manipulating the
	terms of trade by means of these stabilization policy instruments. However, as it
	has been emphasized by \cite{lucas:2003a}, welfare gains from stabilizing
	fluctuations are generically small since they are of second order. In this paper,
	I develop a dynamic stochastic two-country model with sticky wages and a
	cash-in-advance restriction which is in the spirit of the New Open Economy
	Macroeconomics framework. In this environment, monetary authorities can manipulate
	the terms of trade by conducting a general short-run monetary policy using both
	the nominal interest rate and the money supply. The money supply affects the terms
	of trade by altering the nominal exchange rate ex post and it is used in the
	traditional way so as to stabilize macroeconomic fluctuations. The nominal interest
	rate affects the terms of trade by changing expected inflation ex ante. Self-oriented
	national policymakers use the nominal interest rates to raise the terms of trade
	ex ante. This leads to an inefficient inflation tax whose welfare effects are of
	first order. Consequently, gains from monetary policy coordination are of first order.
Note: 
Length: 25
Creation-Date: 2007-07
Revision-Date: 
File-URL: http://www.wiwi.uni-bonn.de/bgsepapers/bonedp/bgse10_2007.pdf
File-Format: application/pdf
Handle: RePEc:bon:bonedp:bgse10_2007