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Price and trade effects of exchange rate fluctuations and the design of policy coordination

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  • Cohen, Daniel
  • Wyplosz, Charles

Abstract

We analyze a two-country zone facing a joint inflationary shock and responding with coordinated and uncoordinated monetary and fiscal policies. We show that the standard presumption that the absence of coordination results in an excessive exchange rate appreciation of the zone with respect to the rest of the world hinges on a specific assumption: that within the two countries considered, the price effect of exchange rate fluctuations dominates the trade effects relatively to the corresponding effects vis-a-vis the rest of the world. If the relative hierarchy goes the other way around (as we argue is likely for EC countries), the standard conclusion is reversed, resulting in insufficiently active monetary and fiscal policies. The paper considers asymmetric shocks as well as monetary policy coordination.
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  • Cohen, Daniel & Wyplosz, Charles, 1995. "Price and trade effects of exchange rate fluctuations and the design of policy coordination," Journal of International Money and Finance, Elsevier, vol. 14(3), pages 331-347, June.
    • Handle: RePEc:eee:jimfin:v:14:y:1995:i:3:p:331-347
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    References listed on IDEAS

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    1. Jeffrey Sachs, 1983. "International Policy Coordination in a Dynamic Macroeconomic Model," NBER Working Papers 1166, National Bureau of Economic Research, Inc.
    2. Rose, Andrew K. & Yellen, Janet L., 1989. "Is there a J-curve?," Journal of Monetary Economics, Elsevier, vol. 24(1), pages 53-68, July.
    3. Marcus Miller & Mark Salmon, 1985. "Policy Coordination and Dynamic Games," NBER Chapters, in: International Economic Policy Coordination, pages 184-227, National Bureau of Economic Research, Inc.
    4. Daniel Cohen & Philippe Michel, 1988. "How Should Control Theory Be Used to Calculate a Time-Consistent Government Policy?," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 55(2), pages 263-274.
    5. Cohen, Daniel & Wyplosz, Charles, 1989. "The European Monetary Union: An Agnostic Evaluation," CEPR Discussion Papers 306, C.E.P.R. Discussion Papers.
    6. Cohen, Daniel, 1989. "Monetary and fiscal policy in an open economy with or without policy coordination," European Economic Review, Elsevier, vol. 33(2-3), pages 303-309, March.
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    Cited by:

    1. Cohen, Daniel & Loisel, Olivier, 2001. "Why was the euro weak? Markets and policies," European Economic Review, Elsevier, vol. 45(4-6), pages 988-994, May.
    2. Cohen, Daniel, 1997. "How will the euro behave ?," CEPREMAP Working Papers (Couverture Orange) 9704, CEPREMAP.
    3. Charles Wyplosz & Jean Pisani- Ferry, 1990. "Les implications budgétaires de l'union monétaire," Revue de l'OFCE, Programme National Persée, vol. 33(1), pages 155-173.

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    More about this item

    JEL classification:

    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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