International policy coordination in interdependent monetary economies
A classical equilibrium model is analysed of two interdependent monetary economies in which it is assumed that cash is the only asset, and which is characterized by perfect foresight, flexible exchange rates and imperfect substitution between home and foreign goods. The first-best optimum sets the marginal rate of substitution between private and public goods to unity and leads to no tax distortions and the optimal quantity of money. Both non-cooperative and cooperative market-oriented outcomes are time-inconsistent, since each government has an incentive to renege and levy a surprise inflation tax. International policy coordination without precommitment can be counterproductive even though there are no tax distortions and the provision of public goods is optimal, since it exacerbates the credibility problems perceived by the private sectors and therefore leads to excessive inflation and too low a level of real money balances. The reason is that a unilateral surprise inflation tax induces a real depreciation and leads to inflation costs, but a multilateral expansion of monetary growth does not. The typical ranking in order of decreasing welfare is first-best optimum, cooperation with precommitment, competition with precommitment, competition without precommitment and coordination without precommitment.
(This abstract was borrowed from another version of this item.)
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
When requesting a correction, please mention this item's handle: RePEc:eee:inecon:v:25:y:1988:i:1-2:p:1-23. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Shamier, Wendy)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.