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Inflation in Open Economies with Complete Markets

Author

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  • Marco Celentani

    ()

  • J. Conde-Ruiz

    ()

  • Klaus Desmet

    ()

Abstract

This Paper uses an overlapping generations model to analyse monetary policy in a two-country model with asymmetric shocks. Agents insure against risk through the exchange of a complete set of real securities. Each central bank is able to commit to the contingent monetary policy rule that maximizes domestic welfare. In an attempt to improve their country's terms of trade of securities, central banks may choose to commit to costly inflation in favourable states of nature. In equilibrium the effects on the terms of trade wash out, leaving both countries worse off. Countries facing asymmetric shocks may therefore gain from monetary cooperation.
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Suggested Citation

  • Marco Celentani & J. Conde-Ruiz & Klaus Desmet, 2007. "Inflation in Open Economies with Complete Markets," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 31(2), pages 271-291, May.
  • Handle: RePEc:spr:joecth:v:31:y:2007:i:2:p:271-291
    DOI: 10.1007/s00199-006-0091-9
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    References listed on IDEAS

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    1. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
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    3. Marco Celentani & J. Ignacio Conde-Ruiz & Klaus Desmet, 2004. "Endogenous Policy Leads to Inefficient Risk Sharing," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(3), pages 758-787, July.
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    8. Kurz, Mordecai & Jin, Hehui & Motolese, Maurizio, 2005. "The role of expectations in economic fluctuations and the efficacy of monetary policy," Journal of Economic Dynamics and Control, Elsevier, vol. 29(11), pages 2017-2065, November.
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    Citations

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    Cited by:

    1. Timur Hulagu & Devrim Ikizler, 2010. "Effects of Monetary Unions on Inequalities (Para Birliklerinin Esitsizlikler Uzerindeki Etkileri)," Working Papers 1014, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    2. David Arseneau, 2012. "Expectation traps in a new Keynesian open economy model," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 49(1), pages 81-112, January.
    3. Simon Sosvilla-Rivero & Pedro Rodriguez, 2010. "Linkages in international stock markets: evidence from a classification procedure," Applied Economics, Taylor & Francis Journals, vol. 42(16), pages 2081-2089.

    More about this item

    Keywords

    Inflation; Risk sharing; Security markets; Terms of trade; Monetary cooperation; Currency union; E5; F3; F42;

    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • F30 - International Economics - - International Finance - - - General
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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