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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

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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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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: Jul 1989
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Handle: RePEc:nbr:nberwo:2604

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. 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. [Downloadable!] (restricted)
  2. Poole, William, 1970. "Optimal Choice of Monetary Policy Instruments in a Simple Stochastic Macro Model," The Quarterly Journal of Economics, MIT Press, vol. 84(2), pages 197-216, May. [Downloadable!] (restricted)
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  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. [Downloadable!] (restricted)
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  4. 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. [Downloadable!] (restricted)
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  5. Stephen J. Turnovsky & Vasco d'Orey, 1987. "Monetary Policies in Interdependent Economies with Stochastic Disturbances: A Strategic Approach," NBER Working Papers 1824, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  6. Joseph Farrell, 1987. "Cheap Talk, Coordination, and Entry," RAND Journal of Economics, The RAND Corporation, vol. 18(1), pages 34-39, Spring. [Downloadable!] (restricted)
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  1. Lombardo, Giovanni & Sutherland, Alan, 2004. "Policy Instrument Choice and non-coordinated Monetary Policy in Interdependent Economies," CEPR Discussion Papers 4257, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  2. Dale Henderson & Ning Zhu, 1990. "Uncertainty and the choice of instruments in a two-country monetary-policy game," Open Economies Review, Springer, vol. 1(1), pages 39-65, February. [Downloadable!] (restricted)
  3. 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. [Downloadable!]
  4. Günter Coenen & Giovanni Lombardo & Frank Smets & Roland Straub, 2007. "International Transmission and Monetary Policy Cooperation," NBER Chapters, in: International Dimensions of Monetary Policy National Bureau of Economic Research, Inc. [Downloadable!]
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  5. Leonardo Gambacorta, 1999. "What is the Optimal Institutional Arrangement for a Monetary Union?," Temi di discussione (Economic working papers) 356, Bank of Italy, Economic Research Department. [Downloadable!]
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  6. Dale W. Henderson & Ning S. Zhu, 1995. "Uncertainty, instrument choice, and the uniqueness of Nash equilibrium: microeconomic and macroeconomic examples," International Finance Discussion Papers 526, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  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, vol. 9(3), pages 265-284, July. [Downloadable!] (restricted)
  8. Leonardo Gambacorta, 1998. "Heterogeneous "Credit Channels" and Optimal Monetary Policy in a Monetary Union," Temi di discussione (Economic working papers) 340, Bank of Italy, Economic Research Department. [Downloadable!]
    Other versions:
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