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Monetary policy interaction within or without an exchange-rate arrangement

Author

Listed:
  • Daniel Gros
  • Timothy Lane

Abstract

In a simple stochastic two-country model in which each country uses monetary policy to offset shocks that impinge on its national income, the policy rule chosen by each country is affected by the rule chosen by the other. A monetary union emerges as a Nash equilibrium (and is Pareto optimal) if the variance of shocks affecting the real exchange rate is small. An exchange-rate arrangement, and in particular a system of exchange-rate bands such as the European Monetary System (EMS), may create a need for more policy cooperation and may give scope for strategic asymmetries. Copyright Kluwer Academic Publishers 1992

Suggested Citation

  • Daniel Gros & Timothy Lane, 1992. "Monetary policy interaction within or without an exchange-rate arrangement," Open Economies Review, Springer, vol. 3(1), pages 61-82, February.
  • Handle: RePEc:kap:openec:v:3:y:1992:i:1:p:61-82 DOI: 10.1007/BF01886182
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    References listed on IDEAS

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    1. Boyer, Russell S, 1978. "Optimal Foreign Exchange Market Intervention," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 1045-1055, December.
    2. Canzoneri, Matthew B. & Henderson, Dale W., 1988. "Is sovereign policymaking bad?," Carnegie-Rochester Conference Series on Public Policy, Elsevier, pages 93-140.
    3. Lane, Timothy D., 1990. "National sovereignty and international monetary order," Journal of International Economics, Elsevier, pages 351-368.
    4. Francesco Giavazzi & Marco Pagano, 1991. "The Advantage of Tying One's Hands: EMS Discipline and Central Bank Credibility," NBER Chapters,in: International Volatility and Economic Growth: The First Ten Years of The International Seminar on Macroeconomics, pages 303-330 National Bureau of Economic Research, Inc.
    5. Lane, Timothy D., 1989. "Foreign exchange market intervention in interdependent economies: A case for capricious policy?," Journal of Macroeconomics, Elsevier, pages 513-531.
    6. Paul R. Krugman, 1988. "Target Zones and Exchange Rate Dynamics," NBER Working Papers 2481, National Bureau of Economic Research, Inc.
    7. Brunner, Karl & Meltzer, Allan H., 1988. "Stabilization policies and labor markets," Carnegie-Rochester Conference Series on Public Policy, Elsevier, pages 1-8.
    8. Barro, Robert J., 1976. "Rational expectations and the role of monetary policy," Journal of Monetary Economics, Elsevier, vol. 2(1), pages 1-32, January.
    9. Don E. Roper & Stephen J. Turnovsky, 1980. "Optimal Exchange Market Intervention in a Simple Stochastic Macro Model," Canadian Journal of Economics, Canadian Economics Association, vol. 13(2), pages 296-309, May.
    10. Fratianni, Michele & von Hagen, Juergen, 1990. "The European Monetary System ten years after," Carnegie-Rochester Conference Series on Public Policy, Elsevier, pages 173-241.
    11. Gilles Oudiz & Jeffrey Sachs, 1984. "Macroeconomic Policy Coordination among the Industrial Economies," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 15(1), pages 1-76.
    12. Stockman, Alan C., 1988. "Sectoral and national aggregate disturbances to industrial output in seven European countries," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 387-409.
    13. Willem H. Buiter & Jonathan Eaton, 1980. "Policy Decentralization and Exchange Rate Management in Interdependent Economies," NBER Working Papers 0531, National Bureau of Economic Research, Inc.
    14. Robert P. Flood & Peter M. Garber, 1989. "The Linkage Between Speculative Attack and Target Zone Models of Exchange Rates," NBER Working Papers 2918, National Bureau of Economic Research, Inc.
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    Citations

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    Cited by:

    1. Lorenzo Bini-Smaghi & Silvia Vori, 1993. "Is there a “triffin dilemma” for the EMS?," Open Economies Review, Springer, pages 175-188.
    2. Joseph Daniels & David VanHoose, 1998. "Two-Country Models of Monetary and Fiscal Policy: What Have We Learned? What More Can We Learn?," Open Economies Review, Springer, pages 265-284.
    3. Daniels, Joseph, 1997. "Optimal sterilization policies in interdependent economies," Journal of Economics and Business, Elsevier, pages 43-60.

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