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Cooperative Design for Central Banks versus Cooperative Implementation of Monetary Policy

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  • Juan Carlos Negrete

Abstract

The game‐theoretic literature on monetary policy in open economies has traditionally concluded that central banks should implement monetary policy in a cooperative fashion. This paper considers an alternative mechanism for internalizing the external effects: in the first stage, governments cooperatively design central banks’ objective functions; in the second stage, central banks implement monetary policy without cooperation. Although this regime lacks flexibility to deal with asymmetric shocks, it presents important advantages in relation to the former scenario: first, it enjoys more credibility; second, it entails lower coordination and information costs; and finally, it hampers unilateral manipulation of central banks’ objectives.

Suggested Citation

  • Juan Carlos Negrete, 2000. "Cooperative Design for Central Banks versus Cooperative Implementation of Monetary Policy," Review of International Economics, Wiley Blackwell, vol. 8(2), pages 252-260, May.
  • Handle: RePEc:bla:reviec:v:8:y:2000:i:2:p:252-260
    DOI: 10.1111/1467-9396.00219
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