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Optimum Policy Domains in an Interdependent World

  • Michael P. Evers

    ()

In this paper, I argue that international policy coordination requires to include both monetary as well as fiscal policy because both sides include policy instruments that allow the strategic manipulation of the country's terms of trade. Hence, the coordination of one part of national macroeconomic policies through an international agreement still leaves room for national authorities to still unilaterally manipulate the terms of trade by means of different policy instruments. In a simple and tractable dynamic stochastic two-country sticky-wage model in line with the recent New Open Economy Macroeconomics it is demonstrated that potential gains from international policy coordination are squandered if policymakers only cooperate on monetary policy. Moreover, by letting the fiscal policy instruments be chosen non-cooperatively, monetary policy coordination might even create welfare losses as compared to no macroeconomic policy coordination at all.

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File URL: http://www.wiwi.uni-bonn.de/bgsepapers/bonedp/bgse12_2007.pdf
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Paper provided by University of Bonn, Germany in its series Bonn Econ Discussion Papers with number bgse12_2007.

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Length: 26
Date of creation: Aug 2007
Date of revision:
Handle: RePEc:bon:bonedp:bgse12_2007
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Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany

Fax: +49 228 73 6884
Web page: http://www.bgse.uni-bonn.de

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  9. Maurice Obstfeld and Kenneth Rogoff., 1995. "Exchange Rate Dynamics Redux," Center for International and Development Economics Research (CIDER) Working Papers C95-048, University of California at Berkeley.
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  11. Michael Evers, 2007. "Optimal Monetary Policy in an Interdependent World," Bonn Econ Discussion Papers bgse10_2007, University of Bonn, Germany.
  12. Rogoff, Kenneth, 1985. "Can international monetary policy cooperation be counterproductive?," Journal of International Economics, Elsevier, vol. 18(3-4), pages 199-217, May.
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  19. Andersen, Torben M & Spange, Morten, 2002. "International Interdependencies in Fiscal Stabilization Policies," CEPR Discussion Papers 3580, C.E.P.R. Discussion Papers.
  20. Benigno, Pierpaolo, 2001. "Price Stability with Imperfect Financial Integration," CEPR Discussion Papers 2854, C.E.P.R. Discussion Papers.
  21. Pappa, Evi, 2004. "Do the ECB and the fed really need to cooperate? Optimal monetary policy in a two-country world," Journal of Monetary Economics, Elsevier, vol. 51(4), pages 753-779, May.
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  25. Dixit, Avinash & Lambertini, Luisa, 2001. "Monetary-fiscal policy interactions and commitment versus discretion in a monetary union," European Economic Review, Elsevier, vol. 45(4-6), pages 977-987, May.
  26. Cooper, Richard N., 1985. "Economic interdependence and coordination of economic policies," Handbook of International Economics, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 2, chapter 23, pages 1195-1234 Elsevier.
  27. Bernardino Adao, 2000. "Gaps and Triangles," Econometric Society World Congress 2000 Contributed Papers 1904, Econometric Society.
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