International Monetary Policy Coordination and Competitive Depreciation: A Re-Evaluation
AbstractIs there a need for international coordination of monetary policies within the current system of floating exchange rates? In a recent paper, Obstfeld and Rogo (1995) argue that in an environment of sticky prices, and floating exchange rates, monetary policy shocks will generate positive welfare spillovers across countries. This leads to the conclusion that international monetary policy coordination is unnecessary, and may in fact be undesirable, since it nurtures a bias towards high inflation. The present paper shows that these conclusions are dependent on the manner in which prices are set. When firms engage in 'pricing-to-market' (PTM), setting prices in the currency of the buyer, monetary policy tends to have negative welfare spillovers. This gives an incentive to engage in 'competitive depreciation'. In a noncooperative equilibrium, world inflation will be higher, the greater the importance of PTM. With a high degree of PTM, the case for international monetary policy coordination is restored. If PTM is at an intermediate range, however, international monetary coordination may have no consequences at all.
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Bibliographic InfoPaper provided by UBC Department of Economics in its series UBC Departmental Archives with number 99-07.
Length: 27 pages
Date of creation: 1999
Date of revision:
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PRICING ; EXCHANGE RATE ; INTERNATIONAL MONETARY POLICY;
Other versions of this item:
- Betts, Caroline & Devereux, Michael B, 2000. "International Monetary Policy Coordination and Competitive Depreciation: A Reevaluation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(4), pages 722-45, November.
- F30 - International Economics - - International Finance - - - General
- F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
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