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Asymmetric Shocks, Risk Sharing, and the Latter Mundell

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Author Info
Klaus Desmet () (Universidad Carlos III de Madrid)

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Abstract

This paper analyzes optimal monetary policy in a two-country model with asymmetric shocks. Agents insure against risk through the exchange of Arrow-Debreu securities. Although central banks commit to the policy that maximizes domestic welfare, this does not lead to price stability. In an attempt to improve their country’s terms of trade of securities, central banks may choose an inflationary policy rule in good states. If both central banks do so, 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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File URL: http://www.bde.es/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/02/Fic/dt0222e.pdf
File Format: application/pdf
File Function: First version, October 2002
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Publisher Info
Paper provided by Banco de España in its series Banco de España Working Papers with number 0222.

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Length: 31 pages
Date of creation: Oct 2002
Date of revision:
Handle: RePEc:bde:wpaper:0222

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Related research
Keywords: asymmetric shocks; risk sharing; monetary cooperation; terms of trade; security markets;

Find related papers by JEL classification:
E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
F3 - International Economics - - International Finance
F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

References listed on IDEAS
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  1. Ronald McKinnon, 2000. "Mundell, the Euro, and Optimum Currency Areas," Working Papers 00009, Stanford University, Department of Economics. [Downloadable!]
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This page was last updated on 2009-12-10.

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