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Monetary Policy Rules in an Interdependent World

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  • Kollmann, Robert

Abstract

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.

Suggested Citation

  • Kollmann, Robert, 2003. "Monetary Policy Rules in an Interdependent World," CEPR Discussion Papers 4012, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:4012
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    More about this item

    Keywords

    business cycles; exchange rate regime; interest rate parity;
    All these keywords.

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • F30 - International Economics - - International Finance - - - General
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General

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