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.Only in the classical flexible price level model with forward-looking rational expectations is credibility of current announcements of future monetary policy necessary and sufficient for costless, irmnediate disinflation. If price level inertia prevails, 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 accompanies successful disinflation, if the transition is to be costless (and immediate). 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. They 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 National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1584.
Date of creation: Mar 1985
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Publication status: published as Buiter, Willem H. "International Monetary Policy to Promote Economic Recovery," Monetary Conditions for Economic Recovery, ed. C. Van Ewijk and J.J. Klant, Financial and Monetary Policy Studies, Vol. II, 1985, Dordrecht/Boston/London: Martinus Nijhoff Publishers, pp. 129-160.
Note: ITI IFM
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- Buiter, Willem H, 1985. "International Monetary Policy to Promote Economic Recovery," CEPR Discussion Papers 55, C.E.P.R. Discussion Papers.
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- 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.
- 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.
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