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Monetary Policy Interactions under Managed Exchange Rates

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  • Giavazzi, Francesco
  • Giovannini, Alberto

Abstract

This paper studies a two-country monetary system where one country sets its money stock, but gives up control of the exchange rate, and the other country gives up control of its own money stock, but can set the exchange rate independently. Cournot-Nash equilibria under managed rates differ significantly from those under fixed or floating rates. The country that controls the exchange rate can effectively offset inflationary shocks by changing the exchange rate, at the expense of the foreign country, and, as a result, can be better off than the foreign country. This result provides an example of a successful disinflation through an exchange rate appreciation in a two-country world, and it indicates that managed exchange rate regimes tend to be "unstable," since both countries find it desirable to affect the exchange rate. Managed exchange rates, however, are a stable outcome when the "center" country is so much larger than its partner that changes in the real exchange rate do not affect its output and real income. Copyright 1989 by The London School of Economics and Political Science.

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Bibliographic Info

Article provided by London School of Economics and Political Science in its journal Economica.

Volume (Year): 56 (1989)
Issue (Month): 222 (May)
Pages: 199-213

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Handle: RePEc:bla:econom:v:56:y:1989:i:222:p:199-213

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Cited by:
  1. George Alogoskoufis & Richard Portes, 1991. "International Costs and Benefits from EMU," NBER Working Papers 3384, National Bureau of Economic Research, Inc.
  2. René Cabral-Torres, . "Monetary and Fiscal Policy Coordination," Discussion Papers 05/28, Department of Economics, University of York.
  3. Jochem, Axel, 1999. "Währungspolitische Interdependenz der EU-Beitrittskandidaten und die Wahl eines geeigneten Wechselkurssystems: Beitrag für den Projektbericht: Währungspolitische Optionen für die mittel- und osteu," Working Papers in Economics 1999,5, Universität der Bundeswehr München, Economic Research Group.
  4. Dale W. Henderson & Ning S. Zhu, 1995. "Uncertainty, instrument choice, and the uniqueness of Nash equilibrium: microeconomic and macroeconomic examples," International Finance Discussion Papers 526, Board of Governors of the Federal Reserve System (U.S.).
  5. Santos Silva, J.M.C & Tenreyro, Silvana, 2010. "Currency Unions in Prospect and Retrospect," CEPR Discussion Papers 7824, C.E.P.R. Discussion Papers.
  6. Ghironi, Fabio & Giavazzi, Francesco, 1998. "Currency areas, international monetary regimes, and the employment-inflation tradeoff," Journal of International Economics, Elsevier, vol. 45(2), pages 259-296, August.
  7. Carrera, Jorge Eduardo, 1995. "Efectos precio y comercio en un area monetaria asimetrica
    [Price and trade effects in an asymmetric monetary area]
    ," MPRA Paper 7844, University Library of Munich, Germany.
  8. Ploeg, F. van der, 1990. "Macroeconomic policy coordination during the various phases of economic and monetary integration in Europe," Discussion Paper 1990-61, Tilburg University, Center for Economic Research.
  9. Carraro, Carlo & Giavazzi, Francesco, 1988. "Can International Policy Coordination Really Be Counterproductive?," CEPR Discussion Papers 258, C.E.P.R. Discussion Papers.
  10. Loukas Stemitsiotis, 1999. "L’euro et les pays partenaires méditerranéens," Revue d'Économie Financière, Programme National Persée, vol. 52(2), pages 75-97.
  11. Dale Henderson & Ning Zhu, 1990. "Uncertainty and the choice of instruments in a two-country monetary-policy game," Open Economies Review, Springer, vol. 1(1), pages 39-65, February.
  12. Var Der Ploeg, F., 1989. "Monetary Interdependence Under Alternative Exchange-Rate Regime," Papers 8920, Tilburg - Center for Economic Research.
  13. Giorgio Gomel, 2001. "Implications of the Euro for International Monetary Relations: A Pole of Attraction in Europe and in the Mediterranean Basin," EUI-RSCAS Working Papers 34, European University Institute (EUI), Robert Schuman Centre of Advanced Studies (RSCAS).

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