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International Policy Coordination and Simple Monetary Policy Rules

  • Wolfram Berger

This paper studies monetary policy in an optimizing two-country model. We suppose a two-step production process that is associated with vertical trade. Prices of final consumption goods are sticky and pass-through can be incomplete. Monetary authorities should respond to both home and foreign shocks in this set-up. Which simple, i.e. non-optimal, targeting rule best supports the welfare maximizing policy hinges critically on the degree of the cross-country interdependence in production and the relative importance of productivity and cost-push shocks. We argue that the relative volatility of productivity and cost-push shocks determines whether the monetary authority should follow a price targeting rule whereas the degree of vertical integration determines which simple price targeting rule (producer or consumer price index targeting) is best.

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Article provided by Swiss Society of Economics and Statistics (SSES) in its journal Swiss Journal of Economics and Statistics.

Volume (Year): 146 (2010)
Issue (Month): II (June)
Pages: 451-479

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Handle: RePEc:ses:arsjes:2010-ii-2
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