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Optimal Monetary Policy in an Estimated Local Currency Pricing Model

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  • Okano, Eiji
  • Eguchi, Masataka
  • Gunji, Hiroshi
  • Miyazaki, Tomomi

Abstract

We 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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File URL: http://hermes-ir.lib.hit-u.ac.jp/rs/bitstream/10086/22136/1/DP558.pdf
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Bibliographic Info

Paper provided by Institute of Economic Research, Hitotsubashi University in its series Discussion Paper Series with number 558.

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Length: 32 p.
Date of creation: Jan 2012
Date of revision:
Handle: RePEc:hit:hituec:558

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Keywords: local currency pricing; optimal monetary policy; CPI inflation; fixed exchange rate; Bayesian estimation;

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  1. Frank Smets & Matthieu Darracq Pariès & Stéphane Adjemian, 2008. "A quantitative perspective on optimal monetary policy cooperation between the US and the euro area," Working Paper Series 884, European Central Bank.
  2. Philip R. Lane & Michael B. Devereux,Juanyi Xu, 2005. "Exchange Rates and Monetary Policy in Emerging Market Economies," The Institute for International Integration Studies Discussion Paper Series iiisdp036, IIIS.
  3. Vicente Tuesta & Pau Rabanal, 2006. "Euro-Dollar Real Exchange Rate Dynamics in an Estimated Two-Country Model: What Is Important and What Is Not," IMF Working Papers 06/177, International Monetary Fund.
  4. Andrea Ferrero, 2005. "Fiscal and Monetary Rules for a Currency Union," Macroeconomics 0508020, EconWPA.
  5. Gianluca Benigno & Pierpaolo Benigno, 2003. "Designing targeting rules for international monetary policy cooperation," Working Paper Series 279, European Central Bank.
  6. Sugo, Tomohiro & Ueda, Kozo, 2008. "Estimating a dynamic stochastic general equilibrium model for Japan," Journal of the Japanese and International Economies, Elsevier, vol. 22(4), pages 476-502, December.
  7. Jordi Gal� & Tommaso Monacelli, 2005. "Monetary Policy and Exchange Rate Volatility in a Small Open Economy," Review of Economic Studies, Oxford University Press, vol. 72(3), pages 707-734.
  8. Yash P. Mehra & Bansai Sawhney, 2010. "Inflation measure, Taylor rules, and the Greenspan-Bernanke years," Economic Quarterly, Federal Reserve Bank of Richmond, issue 2Q, pages 123-151.
  9. Gianluca Benigno & Pierpaolo Benigno, 2004. "Designing Target Rules for International Monetary Policy Cooperation," CEP Discussion Papers dp0666, Centre for Economic Performance, LSE.
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