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Inflation in Open Economies with Complete Markets

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  • Marco Celentani

    ()

  • J. Conde-Ruiz

    ()

  • Klaus Desmet

    ()

Abstract

This Paper uses an overlapping generations model to analyse monetary policy in a two-country model with asymmetric shocks. Agents insure against risk through the exchange of a complete set of real securities. Each central bank is able to commit to the contingent monetary policy rule that maximizes domestic welfare. In an attempt to improve their country's terms of trade of securities, central banks may choose to commit to costly inflation in favourable states of nature. In equilibrium the effects on the terms of trade wash out, leaving both countries worse off. Countries facing asymmetric shocks may therefore gain from monetary cooperation.

(This abstract was borrowed from another version of this item.)

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File URL: http://hdl.handle.net/10.1007/s00199-006-0091-9
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Bibliographic Info

Article provided by Springer in its journal Economic Theory.

Volume (Year): 31 (2007)
Issue (Month): 2 (May)
Pages: 271-291

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Handle: RePEc:spr:joecth:v:31:y:2007:i:2:p:271-291

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Related research

Keywords: Inflation; Risk sharing; Security markets; Terms of trade; Monetary cooperation; Currency union; E5; F3; F42;

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References

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  1. Alberto Alesina & Robert J. Barro, 2002. "Currency Unions," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 117(2), pages 409-436, May.
  2. Thomas F. Cooley & Gary D. Hansen, 1987. "The Inflation Tax in a Real Business Cycle Model," UCLA Economics Working Papers 496, UCLA Department of Economics.
  3. Gillman, Max, 1993. "The welfare cost of inflation in a cash-in-advance economy with costly credit," Journal of Monetary Economics, Elsevier, Elsevier, vol. 31(1), pages 97-115, February.
  4. Ronald McKinnon, 2002. "Optimum currency areas and the European experience," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 10(2), pages 343-364, July.
  5. Giancarlo Corsetti & Paolo Pesenti, 2001. "Welfare And Macroeconomic Interdependence," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 116(2), pages 421-445, May.
  6. Robert J. Barro & David B. Gordon, 1981. "A Positive Theory of Monetary Policy in a Natural-Rate Model," NBER Working Papers 0807, National Bureau of Economic Research, Inc.
  7. Kurz, Mordecai & Jin, Hehui & Motolese, Maurizio, 2003. "The role of expectations in economic fluctuations and the efficacy of monetary policy," CFS Working Paper Series 2003/42, Center for Financial Studies (CFS).
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Citations

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Cited by:
  1. Timur Hulagu & Devrim Ikizler, 2010. "Effects of Monetary Unions on Inequalities (Para Birliklerinin Esitsizlikler Uzerindeki Etkileri)," Working Papers 1014, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
  2. Simon Sosvilla-Rivero & Pedro N. Rodríguez, . "Linkages in international stock markets: Evidence from a classification procedure," Working Papers 2004-23, FEDEA.
  3. David M. Arseneau, 2004. "Expectation traps in a New Keynesian open economy model," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2004-45, Board of Governors of the Federal Reserve System (U.S.).

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