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The Choice of Monetary Instrument in Two Interdependent Economies Under Uncertainty

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  • Stephen J. Turnovsky
  • Vasco d'Orey

Abstract

This paper analyzes the choice of monetary instrument in a stochastic two country setting where each country's set of monetary policy instruments includes both the money supply and the interest rate. It shows how the optimal choice of instrument is determined In two stages. First, for each pair, the minimum welfare coat for each economy is determined This defines a par of payoff matrices and the second stage involves determining the Nash equilibrium for this bimatrix game. In our illustrative example for the alternative shocks considered, a dominant Nash equilibrium is always obtained.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2604.

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Date of creation: Jun 1988
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Publication status: published as Journal of Monetary Economics, Vol. 23, No. 1, pp. 121-133, (1989).
Handle: RePEc:nbr:nberwo:2604

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  1. Turnovsky, Stephen J., 1984. "Exchange market intervention under alternative forms of exogenous disturbances," Journal of International Economics, Elsevier, vol. 17(3-4), pages 279-297, November.
  2. Stephen J. Turnovsky & Vasco d'Orey, 1986. "Monetary Policies in Interdependent Economies with Stochastic Disturbances: A Strategic Approach," NBER Working Papers 1824, National Bureau of Economic Research, Inc.
  3. Aizenman, Joshua & Frenkel, Jacob A, 1985. "Optimal Wage Indexation, Foreign Exchange Intervention, and Monetary Policy," American Economic Review, American Economic Association, vol. 75(3), pages 402-23, June.
  4. Canzoneri, Matthew B & Gray, Jo Anna, 1985. "Monetary Policy Games and the Consequences of Non-cooperative Behavior," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(3), pages 547-64, October.
  5. Willem H. Buiter & Richard C. Marston, 1985. "International Economic Policy Coordination," NBER Books, National Bureau of Economic Research, Inc, number buit85-1, January.
  6. Joseph Farrell, 1987. "Cheap Talk, Coordination, and Entry," RAND Journal of Economics, The RAND Corporation, vol. 18(1), pages 34-39, Spring.
  7. William Poole, 1970. "Optimal choice of monetary policy instruments in a simple stochastic macro model," Staff Studies 57, Board of Governors of the Federal Reserve System (U.S.).
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Cited by:
  1. Lombardo, Giovanni & Sutherland, Alan, 2006. "Policy instrument choice and non-coordinated monetary policy in interdependent economies," Journal of International Money and Finance, Elsevier, Elsevier, vol. 25(6), pages 855-873, October.
  2. Günter Coenen & Giovanni Lombardo & Frank Smets & Roland Straub, 2007. "International Transmission and Monetary Policy Cooperation," NBER Chapters, in: International Dimensions of Monetary Policy, pages 157-192 National Bureau of Economic Research, Inc.
  3. Dale Henderson & Ning Zhu, 1990. "Uncertainty and the choice of instruments in a two-country monetary-policy game," Open Economies Review, Springer, Springer, vol. 1(1), pages 39-65, February.
  4. Dale W. Henderson & Ning S. Zhu, 1995. "Uncertainty, instrument choice, and the uniqueness of Nash equilibrium: microeconomic and macroeconomic examples," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 526, Board of Governors of the Federal Reserve System (U.S.).
  5. Gambacorta, Leonardo, 2003. "Asymmetric bank lending channels and ECB monetary policy," Economic Modelling, Elsevier, vol. 20(1), pages 25-46, January.
  6. Lombardo, Giovanni & Sutherland, Alan, 2004. "Policy instrument choice and non-coordinated monetary in interdependent economies," Discussion Paper Series 1: Economic Studies 2004,03, Deutsche Bundesbank, Research Centre.
  7. Joseph Daniels & David VanHoose, 1998. "Two-Country Models of Monetary and Fiscal Policy: What Have We Learned? What More Can We Learn?," Open Economies Review, Springer, Springer, vol. 9(3), pages 265-284, July.

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