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Monetary Policy Rules in an Interdependent World

  • Kollmann, Robert

This Paper analyses the welfare effects of monetary policy rules in a quantitative business cycle model of a two-country world. The model features staggered price setting, and shocks to productivity and to the uncovered interest rate parity (UIP) condition. UIP shocks have a sizable negative effect on welfare, when trade links are strong. An exchange rate peg may raise world welfare, if the peg eliminates the UIP shocks. The model explains the empirical finding that more open economies are more likely to adopt a peg.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4012.

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Date of creation: Aug 2003
Handle: RePEc:cpr:ceprdp:4012
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  7. Kollmann, Robert, 2002. "Monetary Policy Rules in the Open Economy: Effects on Welfare and Business Cycles," CEPR Discussion Papers 3279, C.E.P.R. Discussion Papers.
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  27. Margarida Duarte & Alan C. Stockman, 2001. "Rational Speculation and Exchange Rates," NBER Working Papers 8362, National Bureau of Economic Research, Inc.
  28. Kollmann, Robert, 2001. "The exchange rate in a dynamic-optimizing business cycle model with nominal rigidities: a quantitative investigation," Journal of International Economics, Elsevier, vol. 55(2), pages 243-262, December.
  29. Faia, Ester, 2001. "Stabilization policy in a two country model and the role of financial frictions," Working Paper Series 0056, European Central Bank.
  30. Hairault, Jean-Olivier & Patureau, Lise & Sopraseuth, Thepthida, 2004. "Overshooting and the exchange rate disconnect puzzle: a reappraisal," Journal of International Money and Finance, Elsevier, vol. 23(4), pages 615-643, June.
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