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Policy Decentralisation and Exchange Rate Management in Interdependent Economies

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  • Buiter, Willem H
  • Eaton, Jonathan

Abstract

The demise of Bretton Woods and of the short-lived Smithsonian agreement has raised questions about exchange rate management by monetary authorities acting in isolation from one another. For instance, will individual monetary authorities have an incentive to stabilise the exchange rate? To what extent will monetary actions abroad disrupt domestic monetary policy? What are the gains from co-ordinating monetary policy? The problems that arise when different agents pursue independent policies in interdependent economies have been explored by a number of authors. Aoki (1976), Cooper (1969), Hamada (1976), Allen and Kenen (1980), McFadden (1967), Patrick (1973), Kydland (1976) and Pindyck (1976), among others, have made significant contributions. Different authors have focused on different aspects of decentralized policy formation. One purpose of this paper is to provide a general discussion of decentralization. A second purpose of this paper is to analyse the optimal design of monetary policy in interdependent economies

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Bibliographic Info

Paper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 172.

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Length: 36 pages
Date of creation: 1980
Date of revision:
Handle: RePEc:wrk:warwec:172

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References

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  1. Weiss, Laurence, 1982. "Information Aggregation and Policy," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 49(1), pages 31-42, January.
  2. McCallum, B. T. & Whitaker, J. K., 1979. "The effectiveness of fiscal feedback rules and automatic stabilizers under rational expectations," Journal of Monetary Economics, Elsevier, Elsevier, vol. 5(2), pages 171-186, April.
  3. Harris, Richard G & Purvis, Douglas D, 1981. "Diverse Information and Market Efficiency in a Monetary Model of the Exchange Rate," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 91(364), pages 829-47, December.
  4. Sargent, Thomas J & Wallace, Neil, 1975. ""Rational" Expectations, the Optimal Monetary Instrument, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 83(2), pages 241-54, April.
  5. Woglom, Geoffrey, 1979. "Rational Expectations and Monetary Policy in a Simple Macroeconomic Model," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 93(1), pages 91-105, February.
  6. Poole, William, 1970. "Optimal Choice of Monetary Policy Instruments in a Simple Stochastic Macro Model," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 84(2), pages 197-216, May.
  7. Canzoneri, Matthew B., 1983. "Rational destabilizing speculation and exchange intervention policy," Journal of Macroeconomics, Elsevier, Elsevier, vol. 5(1), pages 75-90.
  8. 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.
  9. Don E. Roper & Stephen J. Turnovsky, 1980. "Optimal Exchange Market Intervention in a Simple Stochastic Macro Model," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 13(2), pages 296-309, May.
  10. Robert S. Pindyck, 1976. "The Cost of Conflicting Objectives in Policy Formulation," NBER Chapters, in: Annals of Economic and Social Measurement, Volume 5, number 2, pages 239-248 National Bureau of Economic Research, Inc.
  11. Turnovsky, Stephen J, 1980. "The Choice of Monetary Instrument under Alternative Forms of Price Expectations," The Manchester School of Economic & Social Studies, University of Manchester, University of Manchester, vol. 48(1), pages 39-62, March.
  12. Barro, Robert J, 1978. "A Stochastic Equilibrium Model of an Open Economy under Flexible Exchange Rates," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 92(1), pages 149-64, February.
  13. Robert A. Mundell, 1962. "The Appropriate Use of Monetary and Fiscal Policy for Internal and External Stability," IMF Staff Papers, Palgrave Macmillan, vol. 9(1), pages 70-79, March.
  14. Boyer, Russell S, 1978. "Optimal Foreign Exchange Market Intervention," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 86(6), pages 1045-55, December.
  15. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, Elsevier, vol. 4(2), pages 103-124, April.
  16. Aoki, Masanao, 1976. "On decentralized stabilization policies and dynamic assignment problems," Journal of International Economics, Elsevier, Elsevier, vol. 6(2), pages 143-171, May.
  17. Taylor, John B, 1977. "Conditions for Unique Solutions in Stochastic Macroeconomic Models with Rational Expectations," Econometrica, Econometric Society, Econometric Society, vol. 45(6), pages 1377-85, September.
  18. Cooper, Richard N, 1969. "Macroeconomic Policy Adjustment in Interdependent Economies," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 83(1), pages 1-24, February.
  19. Patrick, John D., 1973. "Establishing convergent decentralized policy assignment," Journal of International Economics, Elsevier, Elsevier, vol. 3(1), pages 37-51, February.
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Cited by:
  1. Jonathan Eaton, 1983. "Optimal and Time Consistent Exchange Rate Management in an Overlapping Generations Economy," NBER Working Papers 1196, National Bureau of Economic Research, Inc.
  2. Eaton, Jonathan & Turnovsky, Stephen J, 1984. "The Forward Exchange Market, Speculation, and Exchange Market Intervention," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 99(1), pages 45-69, February.
  3. Santiago García-Verdú & Miguel Zerecero, 2013. "On central bank interventions in the Mexican peso/dollar foreign exchange market," BIS Working Papers 429, Bank for International Settlements.
  4. Daniel Gros & Timothy Lane, 1992. "Monetary policy interaction within or without an exchange-rate arrangement," Open Economies Review, Springer, Springer, vol. 3(1), pages 61-82, February.

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