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Optimal monetary policy with an interest-equalization tax in a two-country macroeconomic model

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  • Benavie, Arthur
  • Froyen, Richard

Abstract

This paper examines the coordination of monetary policy and an interest-equalization tax stabilizer within a two-country macroeconomic model. Within this two-country framework, which allows for wage indexation and includes an imported intermediate good, monetary policy is shown to be severely constrained by the uncovered interest parity condition implied by perfect capital mobility. Introduction of an interest-equalization tax stabilizer into the model significantly enhances policy makers' ability to stabilize output (or price) in the two countries.

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  • Benavie, Arthur & Froyen, Richard, 1992. "Optimal monetary policy with an interest-equalization tax in a two-country macroeconomic model," Journal of Macroeconomics, Elsevier, vol. 14(3), pages 449-466.
    • Handle: RePEc:eee:jmacro:v:14:y:1992:i:3:p:449-466
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    Cited by:

    1. Richard T. Froyen & Alfred V. Guender, 2021. "The Mundellian trilemma and optimal monetary policy in a world of high capital mobility," CAMA Working Papers 2021-64, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    2. Jang-Yung Lee, 1996. "Implications of a Surge in Capital Inflows: Available tools and Consequences for the Conduct of Monetary Policy," IMF Working Papers 1996/053, International Monetary Fund.
    3. Richard T. Froyen & Alfred V. Guender, 2022. "The Mundellian Trilemma and Optimal Monetary Policy in a World of High Capital Mobility," Open Economies Review, Springer, vol. 33(4), pages 631-656, September.

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