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Implementing Monetary Cooperation Through Inflation Targeting

  • Benigno, Gianluca
  • Benigno, Pierpaolo

This Paper presents a two-country dynamic general equilibrium model with imperfect competition and nominal price rigidities in which terms of trade shocks coexist with inefficient supply shocks. We analyse the features of the optimal cooperative solution. While terms of trade shocks should be offset by movements in the exchange rate, inefficient supply shocks are more likely to make a case for a fixed exchange rate regime. Surprisingly, we show that the optimal cooperative solution can be implemented in a strategic context through inflation-targeting regimes. Under these regimes each monetary authority weighs only domestic targets, namely GDP inflation and output gap. Even if there are gains from cooperation, inward-looking monetary policymakers can achieve the first best.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3226.

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Date of creation: Feb 2002
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Handle: RePEc:cpr:ceprdp:3226
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  1. Henrik Jensen, 2002. "Targeting Nominal Income Growth or Inflation?," American Economic Review, American Economic Association, vol. 92(4), pages 928-956, September.
  2. Giancarlo Corsetti & Paolo Pesenti, 2001. "Welfare And Macroeconomic Interdependence," The Quarterly Journal of Economics, MIT Press, vol. 116(2), pages 421-445, May.
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  8. Svensson, Lars E. O., 2002. "Inflation targeting: Should it be modeled as an instrument rule or a targeting rule?," European Economic Review, Elsevier, vol. 46(4-5), pages 771-780, May.
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  18. Michael Woodford, 1998. "Doing Without Money: Controlling Inflation in a Post-Monetary World," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(1), pages 173-219, January.
  19. Pierpaolo Benigno, 2008. "Price stability with imperfect financial integration," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
  20. Jinill Kim & Sunghyun Henry Kim, 1999. "Spurious Welfare Reversals in International Business Cycle Models," Virginia Economics Online Papers 319, University of Virginia, Department of Economics.
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  35. Michael Woodford, 1996. "Control of the Public Debt: A Requirement for Price Stability?," NBER Working Papers 5684, National Bureau of Economic Research, Inc.
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