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Does better information about foreign shocks improve monetary policy?

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  • Tan, Kang Yong
  • Tanaka, Misa

Abstract

This paper examines whether better information about foreign shocks leads to welfare-improving monetary policy using a stylised two-country New Keynesian general equilibrium model. We demonstrate that when terms of trade externality exist and national central banks have the incentives to shift terms of trade in their own favour, the equilibrium under imperfect information may be welfare superior relative to an equilibrium with perfect information. In addition, the welfare gains or losses from information sharing between central banks are found to be small for empirically plausible range of parameters for risk aversion and elasticity of labour supply.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 29 (2010)
Issue (Month): 8 (December)
Pages: 1546-1561

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Handle: RePEc:eee:jimfin:v:29:y:2010:i:8:p:1546-1561

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Web page: http://www.elsevier.com/locate/inca/30443

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Keywords: Policy coordination Imperfect information Monetary policy New open economy macroeconomics;

References

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  1. Maurice Obstfeld & Kenneth Rogoff, 2002. "Global Implications Of Self-Oriented National Monetary Rules," The Quarterly Journal of Economics, MIT Press, vol. 117(2), pages 503-535, May.
  2. Clarida, Richard & GalĂ­, Jordi & Gertler, Mark, 2002. "A Simple Framework for International Monetary Policy Analysis," CEPR Discussion Papers 3355, C.E.P.R. Discussion Papers.
  3. Corsetti, Giancarlo & Pesenti, Paolo, 2005. "International dimensions of optimal monetary policy," Journal of Monetary Economics, Elsevier, vol. 52(2), pages 281-305, March.
  4. Maurice Obstfeld & Kenneth Rogoff, 1999. "New Directions for Stochastic Open Economy Models," NBER Working Papers 7313, National Bureau of Economic Research, Inc.
  5. Pierpaolo Benigno, 2009. "Price Stability with Imperfect Financial Integration," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(s1), pages 121-149, 02.
  6. Benigno, Gianluca & Benigno, Pierpaolo, 2003. "Designing targeting rules for international monetary policy cooperation," Working Paper Series 0279, European Central Bank.
  7. Campbell, John, 1996. "Understanding Risk and Return," Scholarly Articles 3153293, Harvard University Department of Economics.
  8. Friend, Irwin & Blume, Marshall E, 1975. "The Demand for Risky Assets," American Economic Review, American Economic Association, vol. 65(5), pages 900-922, December.
  9. Sutherland, Alan, 2002. "International monetary policy coordination and financial market integration," Working Paper Series 0174, European Central Bank.
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