Optimal Monetary Policy in the Presence of Pricing-to-Market
AbstractThis paper presents a general-equilibrium framework to revisit the issues of optimal monetary policies and international policy coordination in a two-country model, focusing on the role of a pricing-to-market (PTM) policy by firms. Both countries may be different with respect to PTM. Using the set-up developed by Corsetti and Pesenti (2001a) and Betts and Devereux (2000a,b), we show that (i) for a given Foreign monetary stance, a Home monetary expansion is beneficial for both countries only if Home PTM is at an intermediate range; (ii) in a world Nash equilibrium Home and Foreign welfare are bell-shaped in the degrees of PTM; (iii) relative welfare crucially depends on the degrees of PTM; (iv) there is a welfare gain from cooperation even in the cases of no and full PTM.
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Bibliographic InfoPaper provided by University of Kassel, Institute of Economics in its series Discussion Papers in Economics with number 68/05.
Length: 39 pages
Date of creation: Jan 2005
Date of revision:
Publication status: Published in Journal of Macroeconomics, Vol. 28 (2006), Issue 3, pages 564-584.
pricing to market; terms of trade; international coordination of monetary policies;
Find related papers by JEL classification:
- E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
- 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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