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Gains from international monetary policy coordination - does it pay to be different?

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Author Info
Zheng Liu () (Department of Economics, Emory University,Atlanta, GA 30322, USA, and CIRPÉE, Canada)
Evi Pappa () (Department of Economics, The London School of Economics and Political Science, Houghton Street, London WC2A 2AE, UK, and IGIER – Bocconi University and CEP, Italy)

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Abstract

This paper presents a new argument for international monetary policy coordination based on considerations of structural asymmetries across countries. In a two-country world with a traded and a non-traded sector in each country, optimal independent monetary policy cannot replicate the natural-rate allocations. There are potential welfare gains from coordination since the planner under a cooperating regime internalizes a terms-of-trade externality that independent central banks tend to overlook. Yet, with symmetric structures across countries, the gains are quantitatively small. If the size of the traded sector differs across countries, the gains can be sizable and increase with the degree of asymmetry. The planner's optimal policy not only internalizes the terms-of-trade externality, it also creates a terms-of-trade bias in favor the country with a larger traded sector. Further, the planner tries to balance the terms-of-trade bias against the need to stabilize fluctuations in the terms-of-trade gap.

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Paper provided by European Central Bank in its series Working Paper Series with number 514.

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Length: 53 pages
Date of creation: Aug 2005
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Handle: RePEc:ecb:ecbwps:20050514

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Related research
Keywords: International Policy Coordination Optimal Monetary Policy Asymmetric Structures Terms-of-Trade Bias.

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Find related papers by JEL classification:
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Michael P. Evers, . "Optimum Policy Domains in an Interdependent World," Bonn Econ Discussion Papers bgse12_2007, University of Bonn, Germany. [Downloadable!]
  2. Paul Levine & Joseph Pearlman & Peter Welz, 2008. "Robust Inflation-Targeting Rules and the Gains from International Policy Coordination," Department of Economics Discussion Papers 0208, Department of Economics, University of Surrey. [Downloadable!]
  3. Paul Levine & Joseph Pearlman & Bo Yang, 2007. "The Credibility Problem Revisited: Thirty Years on from Kydland and Prescott," Department of Economics Discussion Papers 1807, Department of Economics, University of Surrey. [Downloadable!]
  4. Anna Lipinska, 2007. "The Maastricht Convergence Criteria and Optimal Monetary Policy for the EMU Accession Countries," CEP Discussion Papers dp0808, Centre for Economic Performance, LSE. [Downloadable!]
  5. Lipinska, Anna, 2006. "The Maastricht convergence criteria and optimal monetary policy for the EMU accession countries," MPRA Paper 1795, University Library of Munich, Germany. [Downloadable!]
  6. Riccardo DiCecio, 2005. "Comovement: it's not a puzzle," Working Papers 2005-035, Federal Reserve Bank of St. Louis. [Downloadable!]
    Other versions:
  7. Michael Evers, . "Optimal Monetary Policy in an Interdependent World," Bonn Econ Discussion Papers bgse10_2007, University of Bonn, Germany. [Downloadable!]
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