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A K% Money Growth Leadership Rule In An International Monetary Policy Game

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  • DENNIS W. JANSEN
  • MING‐JANG WENG

Abstract

This paper examines a version of the Friedman k%money growth rule in an open economy monetary policy game. Using the two‐country model proposed by Canzoneri and Henderson (1991), we show that, in response to asymmetric aggregate demand shocks, the Pareto‐efficient outcome can be achieved by a policy that we call a k%money growth leadership rule. Following that rule, one country, the leader, sets her money supply growth rate, and the follower sets her money supply growth rate so as to keep the sum of nominal money supply growth at k%. We show that this policy yields the same outcome as does cooperative equilibrium. We also show that alternative policy rules, such as keeping exchange‐rate adjusted money supply growth at k%, or forming a currency union, will not lead to the Pareto‐efficient outcome in response to these demand shocks. (JEL E5, F3)

Suggested Citation

  • Dennis W. Jansen & Ming‐Jang Weng, 1999. "A K% Money Growth Leadership Rule In An International Monetary Policy Game," Contemporary Economic Policy, Western Economic Association International, vol. 17(4), pages 506-516, October.
    • Handle: RePEc:bla:coecpo:v:17:y:1999:i:4:p:506-516
    DOI: 10.1111/j.1465-7287.1999.tb00700.x
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    References listed on IDEAS

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    1. Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 101-121.
    2. 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 547-564, October.
    3. 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.
    4. repec:bla:ecorec:v:55:y:1979:i:151:p:368-70 is not listed on IDEAS
    5. Matthew B. Canzoneri & Dale W. Henderson, 1991. "Monetary Policy in Interdependent Economies: A Game-Theoretic Approach," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262031787, December.
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    Cited by:

    1. Cabral, René, 2010. "Why dollarization didn't succeed: Comparing credibility and the impact of real shocks on small open economies," The North American Journal of Economics and Finance, Elsevier, vol. 21(3), pages 297-313, December.
    2. René Cabral-Torres, "undated". "Assessing the Impact of Real Shocks on Small Dollarized Economies," Discussion Papers 05/27, Department of Economics, University of York.

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    More about this item

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • F3 - International Economics - - International Finance

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