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Monetary policy interaction within or without an exchange-rate arrangement

  • Daniel Gros
  • Timothy Lane

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

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File URL: http://hdl.handle.net/10.1007/BF01886182
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Article provided by Springer in its journal Open Economies Review.

Volume (Year): 3 (1992)
Issue (Month): 1 (February)
Pages: 61-82

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Handle: RePEc:kap:openec:v:3:y:1992:i:1:p:61-82
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  1. 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.
  2. Buiter, Willem H & Eaton, Jonathan, 1980. "Policy Decentralisation and Exchange Rate Management in Interdependent Economies," The Warwick Economics Research Paper Series (TWERPS) 172, University of Warwick, Department of Economics.
  3. Giavazzi, Francesco & Pagano, Marco, 1988. "The advantage of tying one's hands : EMS discipline and Central Bank credibility," European Economic Review, Elsevier, vol. 32(5), pages 1055-1075, June.
  4. Krugman, Paul R, 1991. "Target Zones and Exchange Rate Dynamics," The Quarterly Journal of Economics, MIT Press, vol. 106(3), pages 669-82, August.
  5. 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.
  6. Lane, Timothy D., 1990. "National sovereignty and international monetary order," Journal of International Economics, Elsevier, vol. 29(3-4), pages 351-368, November.
  7. Brunner, Karl & Meltzer, Allan H., 1988. "Stabilization policies and labor markets," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 28(1), pages 1-8, January.
  8. Boyer, Russell S, 1978. "Optimal Foreign Exchange Market Intervention," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 1045-55, December.
  9. Flood, Robert P & Garber, Peter M, 1991. "The Linkage between Speculative Attack and Target Zone Models of Exchange Rates," The Quarterly Journal of Economics, MIT Press, vol. 106(4), pages 1367-72, November.
  10. Lane, Timothy D., 1989. "Foreign exchange market intervention in interdependent economies: A case for capricious policy?," Journal of Macroeconomics, Elsevier, vol. 11(4), pages 513-531.
  11. Fratianni, Michele & von Hagen, Juergen, 1990. "The European Monetary System ten years after," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 32(1), pages 173-241, January.
  12. 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.
  13. Barro, Robert J., 1976. "Rational expectations and the role of monetary policy," Journal of Monetary Economics, Elsevier, vol. 2(1), pages 1-32, January.
  14. Canzoneri, Matthew B. & Henderson, Dale W., 1988. "Is sovereign policymaking bad?," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 28(1), pages 93-140, January.
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