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Portfolio Preference Uncertainty and Gains from Policy Coordination

Author

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  • Paul R. Masson

    (International Monetary Fund)

Abstract

International policy coordination is generally considered to be made less likely--and less profitable--by uncertainty about how the economy works. This paper offers a counter example, in which investors' increased uncertainty about portfolio preference makes coordination more beneficial. Without such coordination, monetary authorities may respond to financial market uncertainty by not fully accommodating demands for increased liquidity, for fear of inducing exchange rate depreciation. Coordinated monetary expansion would minimize this danger. This result is formalized in a model incorporating an equity market; then, the stock market crash of October 1987 and its implications for monetary policy coordination are discussed.

Suggested Citation

  • Paul R. Masson, 1992. "Portfolio Preference Uncertainty and Gains from Policy Coordination," IMF Staff Papers, Palgrave Macmillan, vol. 39(1), pages 101-120, March.
  • Handle: RePEc:pal:imfstp:v:39:y:1992:i:1:p:101-120
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    Cited by:

    1. Owyong, David T., 2001. "Inflationary finance, capital mobility, and monetary coordination," International Review of Economics & Finance, Elsevier, vol. 10(4), pages 369-382, December.
    2. Yiyong Cai & Warwick McKibbin, 2015. "Uncertainty and International Climate Change Negotiations," Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, Springer;Società Italiana degli Economisti (Italian Economic Association), vol. 1(1), pages 101-115, March.
    3. Barrell, Ray & Dury, Karen & Hurst, Ian, 2003. "International monetary policy coordination: an evaluation using a large econometric model," Economic Modelling, Elsevier, vol. 20(3), pages 507-527, May.
    4. Peter Mooslechner & Martin Schuerz, 1999. "International Macroeconomic Policy Coordination: Any Lessons for EMU? A Selective Survey of the Literature," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 26(3), pages 171-199, September.

    More about this item

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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