Monetary Policy and Co-ordination in a Globalised World

This paper addresses the implications for monetary policies aimed at price stability in an international environment characterised by a high degree of interdependence among different economic areas. The paper argues that the optimal design of the monetary policy strategy has to combine rules with discretion so as to reflect both the characteristics of domestic economies in a globalised world and the need for efficient communication. The flexibility of the monetary policy strategy also has important implications for international monetary policy co-ordination. Recognising that, at least for large economic areas, ?classic? monetary policy co-ordination is not feasible, the paper argues that, instead, monetary policy co-operation, i.e. the exchange of information and views without definite policy commitments, can significantly enhance the efficiency of monetary policy measures. In this respect, any system of co-operation between central banks, if it is to be efficient, requires the various international fora in which such co-operation takes place to be designed and function appropriately. It should be recognised, however, that smaller countries might welcome a ?weaker? form of co-ordination consisting in pegging the exchange rate of their currency to the currency of a larger and more stable country.