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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.

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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. Giancarlo Corsetti & Paolo Pesenti, 1997. "Welfare and Macroeconomic Interdependence," NBER Working Papers 6307, National Bureau of Economic Research, Inc.
  2. Marco Celentani & J. Ignacio Conde & Klaus Desmet, 2002. "Endogenous policy leads to inefficient risk sharing," Economics Working Papers 593, Department of Economics and Business, Universitat Pompeu Fabra, revised Mar 2003.
  3. Gillman, Max, 1993. "The welfare cost of inflation in a cash-in-advance economy with costly credit," Journal of Monetary Economics, Elsevier, vol. 31(1), pages 97-115, February.
  4. 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.
  5. Thomas F. Cooley & Vincenzo Quadrini, 2003. "Common Currencies vs. Monetary Independence," Review of Economic Studies, Oxford University Press, vol. 70(4), pages 785-806.
  6. Stephen Ching & Michael B. Devereux, 2000. "Risk Sharing and the Theory of Optimal Currency Areas: A Re-examination of Mundell 1973," Working Papers 082000, Hong Kong Institute for Monetary Research.
  7. Alberto Alesina & Robert J. Barro, 2002. "Currency Unions," The Quarterly Journal of Economics, MIT Press, vol. 117(2), pages 409-436, May.
  8. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
  9. Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 101-121.
  10. 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).
  11. Stephen Ching & Michael B. Devereux, 2000. "Mundell Revisited: A simple approach to the Costs and Benefits of a Single Currency Area," Working Papers 092000, Hong Kong Institute for Monetary Research.
  12. 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.
  13. Michael Magill & Martine Quinzii, 2002. "Theory of Incomplete Markets, Volume 1," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262632543, December.
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Citations

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Cited by:
  1. Simon Sosvilla-Rivero & Pedro Rodriguez, 2010. "Linkages in international stock markets: evidence from a classification procedure," Applied Economics, Taylor & Francis Journals, vol. 42(16), pages 2081-2089.
  2. David Arseneau, 2012. "Expectation traps in a new Keynesian open economy model," Economic Theory, Springer, vol. 49(1), pages 81-112, January.
  3. 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.

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