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

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Author Info
Liu, Zheng
Pappa, Evi

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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.

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Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 32 (2008)
Issue (Month): 7 (July)
Pages: 2085-2117
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Handle: RePEc:eee:dyncon:v:32:y:2008:i:7:p:2085-2117

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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Paul Levine & Joseph Pearlman & Peter Welz, 2008. "Robust Inflation-Targeting Rules and the Gains from International Policy Coordination," Department of Economics Discussion Papers 0208, Department of Economics, University of Surrey. [Downloadable!]
  2. Paul Levine & Joseph Pearlman & Bo Yang, 2007. "The Credibility Problem Revisited: Thirty Years on from Kydland and Prescott," Department of Economics Discussion Papers 1807, Department of Economics, University of Surrey. [Downloadable!]
    Other versions:
  3. Riccardo DiCecio, 2005. "Comovement: it's not a puzzle," Working Papers 2005-035, Federal Reserve Bank of St. Louis. [Downloadable!]
    Other versions:
  4. Michael P. Evers, 2007. "Optimum Policy Domains in an Interdependent World," Bonn Econ Discussion Papers bgse12_2007, University of Bonn, Germany. [Downloadable!]
  5. Anna Lipinska, 2008. "The Maastricht Convergence Criteria and Optimal Monetary Policy for the EMU Accession Countries," Working Paper Series 896, European Central Bank. [Downloadable!]
    Other versions:
  6. Yuliya Rychalovska, 2007. "Welfare-Based Optimal Monetary Policy in a Two-Sector Small Open Economy," Working Papers 2007/16, Czech National Bank, Research Department. [Downloadable!]
  7. Lipinska, Anna, 2008. "The Maastricht Criteria and Optimal Monetary and Fiscal Policy Mix for the EMU Accession Countries," MPRA Paper 16376, University Library of Munich, Germany. [Downloadable!]
  8. Michael Evers, 2007. "Optimal Monetary Policy in an Interdependent World," Bonn Econ Discussion Papers bgse10_2007, University of Bonn, Germany. [Downloadable!]
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