Optimal Monetary Policy in an Estimated Local Currency Pricing Model
AbstractWe analyze fluctuations in inflation and the nominal exchange rate under optimal monetary policy with local currency pricing by developing two-country DSGE local currency pricing and producer currency pricing models. We estimate our models using Bayesian techniques with Japanese and US data, and calculate impulse response functions. Our estimation results show that local currency pricing is strongly supported against producer currency pricing. From the estimated parameters, we show that completely stabilizing consumer price index inflation is optimal from the viewpoint of minimizing welfare costs and that completely stabilizing consumer price index inflation is consistent with completely stabilizing the nominal exchange rate.
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Bibliographic InfoPaper provided by Institute of Economic Research, Hitotsubashi University in its series Discussion Paper Series with number 558.
Length: 32 p.
Date of creation: Jan 2012
Date of revision:
local currency pricing; optimal monetary policy; CPI inflation; fixed exchange rate; Bayesian estimation;
Find related papers by JEL classification:
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-02-20 (All new papers)
- NEP-CBA-2012-02-20 (Central Banking)
- NEP-DGE-2012-02-20 (Dynamic General Equilibrium)
- NEP-MAC-2012-02-20 (Macroeconomics)
- NEP-MON-2012-02-20 (Monetary Economics)
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