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When Does Coordination Pay?

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  • Miller, Marcus
  • Salmon, Mark

Abstract

In a continuous time model of two symmetric open economies, with a floating exchange rate, we find that the pay-off to the policy coordination depends systematically on the heterogeneity of their inflation experience. While monetary policy coordination improves welfare when there is a common rate of underlying inflation, it exacerbates the `time-consistency' problem arising when there are differences. Since the principle of `certainty equivalence' applies to time-consistent policy in linear quadratic models, we are also able to give a stochastic interpretation of the deterministic results.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 425.

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Date of creation: Jul 1990
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Handle: RePEc:cpr:ceprdp:425

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Related research

Keywords: Certainty Equivalence; Floating Exchange Rates; Policy Coordination; Time Consistency;

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Cited by:
  1. Lockwood, Ben, 1996. "Uniqueness of Markov-perfect equilibrium in infinite-time affine-quadratic differential games," Journal of Economic Dynamics and Control, Elsevier, vol. 20(5), pages 751-765, May.

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