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Designing Target Rules for International Monetary Policy Cooperation

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  • Gianluca Benigno
  • Pierpaolo Benigno

Abstract

This study analyzes a two-country dynamic general equilibrium model with nominal rigidities, monopolisticcompetition and producer currency pricing. A quadratic approximation to the utility of the consumers is derivedand assumed as the policy objective function of the policymakers. It is shown that only under special conditionsthere are no gains from cooperation and moreover that the paths of the exchange rate and prices in theconstrained-efficient solution depend on the kind of disturbance that affects the economy. It might be the caseeither for fixed or floating exchange rates. Despite this result, simple targeting rules that involve only targets forthe growth of output and for both domestic GDP and CPI inflation rates can replicate the cooperative allocation.

Suggested Citation

  • Gianluca Benigno & Pierpaolo Benigno, 2004. "Designing Target Rules for International Monetary Policy Cooperation," CEP Discussion Papers dp0666, Centre for Economic Performance, LSE.
  • Handle: RePEc:cep:cepdps:dp0666
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Corsetti, Giancarlo & Dedola, Luca & Leduc, Sylvain, 2010. "Optimal Monetary Policy in Open Economies," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 16, pages 861-933, Elsevier.
    2. Haberis, Alex & Lipińska, Anna, 2012. "International policy spillovers at the zero lower bound," Bank of England working papers 464, Bank of England.
    3. Corsetti, Giancarlo, 2006. "Openness and the case for flexible exchange rates," Research in Economics, Elsevier, vol. 60(1), pages 1-21, March.
    4. Ascari, Guido & Rankin, Neil, 2007. "Perpetual youth and endogenous labor supply: A problem and a possible solution," Journal of Macroeconomics, Elsevier, vol. 29(4), pages 708-723, December.
    5. Pierpaolo Benigno & Michael Woodford, 2005. "Inflation Stabilization And Welfare: The Case Of A Distorted Steady State," Journal of the European Economic Association, MIT Press, vol. 3(6), pages 1185-1236, December.
    6. Bilbiie, Florin O., 2014. "Delegating optimal monetary policy inertia," Journal of Economic Dynamics and Control, Elsevier, vol. 48(C), pages 63-78.
    7. Michaelis, Jochen & Birk, Angela, 2006. "Employment- and growth effects of tax reforms," Economic Modelling, Elsevier, vol. 23(6), pages 909-925, December.
    8. Okano, Eiji & Eguchi, Masataka & Gunji, Hiroshi & Miyazaki, Tomomi, 2012. "Optimal Monetary Policy in an Estimated Local Currency Pricing Model," Discussion Paper Series 558, Institute of Economic Research, Hitotsubashi University.
    9. Tatiana Kirsanova & Campbell Leith & Simon Wren-Lewis, 2006. "Should Central Banks Target Consumer Prices or the Exchange Rate?," Economic Journal, Royal Economic Society, vol. 116(512), pages 208-231, June.
    10. repec:got:cegedp:29 is not listed on IDEAS
    11. Sutherland, Alan, 2006. "The expenditure switching effect, welfare and monetary policy in a small open economy," Journal of Economic Dynamics and Control, Elsevier, vol. 30(7), pages 1159-1182, July.

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    More about this item

    Keywords

    monetary policy cooperation; sticky prices; welfare analysis; targeting rules; inflation target;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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