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Dynamic Strategic Monetary Policies and Coordination in Interdependent Economies

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  • Stephen J. Turnovsky
  • Tamer Basar
  • Vasco d'Orey

Abstract

This paper develops strategic monetary policies using a standard two-country macro model under flexible exchange rates. The equilibria considered include feedback Nash and feedback Stackelberg, both of which are compared to the Pareto optimal cooperative equilibrium. The optimal policies are obtained as feedback rules in which real money supplies are adjusted to movements in the real exchange rate. The properties of these policies and their welfare implications are analyzed using numerical simulations. The contrast in the present results with those obtained previously for a short-run horizon suggest the importance of both intertemporal and intratemporal tradeoffs in the determination of optimal strategic policies.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2467.

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Date of creation: Dec 1987
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Publication status: published as From American Economic Review, Vol. 78, No. 3, pp. 341-361, (June 1988).
Handle: RePEc:nbr:nberwo:2467

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  1. Peter J. Stemp & Stephen J. Turnovsky, 1986. "Optimal Monetary Policy in an Open Economy," NBER Working Papers 2018, National Bureau of Economic Research, Inc.
  2. Basar, Tamer & Turnovsky, Stephen J. & D'orey, Vasco, 1986. "Optimal strategic monetary policies in dynamic interdependent economies A summary paper," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 10(1-2), pages 15-19, June.
  3. John B. Taylor, 1984. "International Coordination in the Design of Macroeconomic Policy Rules," NBER Working Papers 1506, National Bureau of Economic Research, Inc.
  4. Stephen J. Turnovsky, 1985. "Monetary and Fiscal Policy Under Perfect Foresight: A Symmetric Two Country Analysis," NBER Working Papers 1699, National Bureau of Economic Research, Inc.
  5. Willem H. Buiter & Richard C. Marston, 1985. "International Economic Policy Coordination," NBER Books, National Bureau of Economic Research, Inc, National Bureau of Economic Research, Inc, number buit85-1.
  6. Hamada, Koichi, 1976. "A Strategic Analysis of Monetary Interdependence," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 84(4), pages 677-700, August.
  7. Morton I. Kamien & Nancy L. Schwartz, 1983. "Conjectural Variations," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 16(2), pages 191-211, May.
  8. Martin K. Perry, 1982. "Oligopoly and Consistent Conjectural Variations," Bell Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 13(1), pages 197-205, Spring.
  9. Bresnahan, Timothy F, 1981. "Duopoly Models with Consistent Conjectures," American Economic Review, American Economic Association, American Economic Association, vol. 71(5), pages 934-45, December.
  10. Marcus Miller & Mark Salmon, 1985. "Policy Coordination And Dynamic Games," NBER Chapters, National Bureau of Economic Research, Inc, in: International Economic Policy Coordination, pages 184-227 National Bureau of Economic Research, Inc.
  11. Hughes Hallett, A J, 1984. "Non-cooperative Strategies for Dynamic Policy Games and the Problem of Time Inconsistency," Oxford Economic Papers, Oxford University Press, vol. 36(3), pages 381-99, November.
  12. Rogoff, Kenneth, 1985. "Can international monetary policy cooperation be counterproductive?," Journal of International Economics, Elsevier, Elsevier, vol. 18(3-4), pages 199-217, May.
  13. Gilles Oudiz & Jeffrey Sachs, 1985. "International Policy Coordination In Dynamic Macroeconomic Models," NBER Chapters, National Bureau of Economic Research, Inc, in: International Economic Policy Coordination, pages 274-330 National Bureau of Economic Research, Inc.
  14. Jones, Michael, 1983. "International Liquidity: A Welfare Analysis," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 98(1), pages 1-23, February.
  15. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 84(6), pages 1161-76, December.
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