International Monetary Policy to Promote Economic Recovery
AbstractThe paper studies the design of efficient anti-inflationary policies in a two-country interdependent economic system. A number of alternative specifications of the price formation process are considered, incorporating successively higher degrees of price level and inflation inertia. The credibility of current announcements of future monetary policy is a necessary and sufficient condition for costless, immediate disinflation only in the classical flexible price level model with forward-looking rational expectations. If price level inertia prevails, a costless and immediate disinflation by means of a deceleration of the money growth rate must be accompanied by nominal money 'jumps' or cost-reducing tax cuts in order to accommodate the fall in velocity that follows the disinflation. With a sluggish price level and sluggish core inflation, tax cuts (or incomes policy) are necessary for costless disinflation. In general, the elimination of inflation can only be gradual. With real balance effects on demand, unilateral disinflationary policy always 'spills over' through real interest rates and the real exchange rate. These real balance effects are necessary for the presence of spillovers only in the classical model. Cooperative policy design effectively leaves the national authorities with the same scope for influencing domestic target variables that they would have had in a closed economy.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 55.
Date of creation: Mar 1985
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Other versions of this item:
- Willem H. Buiter, 1985. "International Monetary Policy to Promote Economic Recovery," NBER Working Papers 1584, National Bureau of Economic Research, Inc.
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- Willem H. Buiter, 2004.
"The Elusive Welfare Economics of Price Stability as a Monetary Policy Objective: Should New Keynesian Central Bankers Pursue Price Stability?,"
NBER Working Papers
10848, National Bureau of Economic Research, Inc.
- Buiter, Willem H, 2004. "The Elusive Welfare Economics of Price Stability As A Monetary Policy Objective: Should New Keynesian Central Bankers Persue Price Stability," CEPR Discussion Papers 4730, C.E.P.R. Discussion Papers.
- Buiter, Willem H., 2006. "The elusive welfare economics of price stability as a monetary policy objective: why New Keynesian central bankers should validate core inflation," Working Paper Series 0609, European Central Bank.
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