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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
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Handle: RePEc:cpr:ceprdp:4012
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  1. Maurice Obstfeld & Kenneth Rogoff, 1999. "New Directions for Stochastic Open Economy Models," NBER Working Papers 7313, National Bureau of Economic Research, Inc.
  2. Philippe BACCHETTA & Eric VAN WINCOOP, 1999. "Does Exchange Rate Stability Increase Trade and Welfare ?," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 9917, Université de Lausanne, Faculté des HEC, DEEP.
  3. Erceg, Christopher J. & Henderson, Dale W. & Levin, Andrew T., 2000. "Optimal monetary policy with staggered wage and price contracts," Journal of Monetary Economics, Elsevier, vol. 46(2), pages 281-313, October.
  4. Nicoletta Batini & Richard Harrison & Stephen P Millard, 2001. "Monetary policy rules for an open economy," Bank of England working papers 149, Bank of England.
  5. 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.
  6. Chari, V V & Kehoe, Patrick J & McGrattan, Ellen R, 2002. "Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates?," Review of Economic Studies, Wiley Blackwell, vol. 69(3), pages 533-63, July.
  7. McCallum, Bennett T. & Nelson, Edward, 1999. "Nominal income targeting in an open-economy optimizing model," Journal of Monetary Economics, Elsevier, vol. 43(3), pages 553-578, June.
  8. Kenneth L. Judd, 1998. "Numerical Methods in Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262100711, June.
  9. Duarte, Margarida & Stockman, Alan C., 2005. "Rational speculation and exchange rates," Journal of Monetary Economics, Elsevier, vol. 52(1), pages 3-29, January.
  10. Lane, P, 1999. "The New Open Economy Macroeconomics: A Survey," Trinity Economics Papers 993, Trinity College Dublin, Department of Economics.
  11. Robert Kollmann, 2005. "Macroeconomic effects of nominal exchange rate regimes: new insights into the role of price dynamics," ULB Institutional Repository 2013/7624, ULB -- Universite Libre de Bruxelles.
  12. Robert Kollmann, 2001. "Explaining international comovements of output and asset returns: the role of money and nominal rigidities," ULB Institutional Repository 2013/7632, ULB -- Universite Libre de Bruxelles.
  13. Olivier Jeanne & Andrew K Rose, 1999. "Noise trading and exchange rate regimes," Reserve Bank of New Zealand Discussion Paper Series G99/2, Reserve Bank of New Zealand.
  14. Stephanie Schmitt-Grohe & Martin Uribe, 2001. "Stabilization policy and the costs of dollarization," Proceedings, Federal Reserve Bank of Cleveland, pages 482-517.
  15. Maurice Obstfeld & Kenneth Rogoff, 2003. "Global Implications of Self-Oriented National Monetary Rules," Macroeconomics 0303018, EconWPA.
  16. Collard, Fabrice & Dellas, Harris, 2001. "Exchange Rate Systems and Macroeconomic Stability," CEPR Discussion Papers 2768, C.E.P.R. Discussion Papers.
  17. 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.
  18. Mark, Nelson C & Wu, Yangru, 1998. "Rethinking Deviations from Uncovered Interest Parity: The Role of Covariance Risk and Noise," Economic Journal, Royal Economic Society, vol. 108(451), pages 1686-1706, November.
  19. Benigno, Gianluca, 2004. "Real exchange rate persistence and monetary policy rules," Journal of Monetary Economics, Elsevier, vol. 51(3), pages 473-502, April.
  20. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  21. Fabio Ghironi & Alessandro Rebucci, 2000. "Monetary Rules for Emerging Market Economies," Boston College Working Papers in Economics 476, Boston College Department of Economics, revised 13 Aug 2001.
  22. Julio Rotemberg & Michael Woodford, 1997. "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 297-361 National Bureau of Economic Research, Inc.
  23. McCallum, Bennett T & Nelson, Edward, 2001. "Monetary Policy for an Open Economy: An Alternative Framework with Optimizing Agents and Sticky Prices," CEPR Discussion Papers 2756, C.E.P.R. Discussion Papers.
  24. Kenneth A. Froot and Jeffrey A. Frankel., 1988. "Forward Discount Bias: Is It an Exchange Risk Premium?," Economics Working Papers 8874, University of California at Berkeley.
  25. repec:cup:cbooks:9780521632737 is not listed on IDEAS
  26. 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.
  27. Kollmann, Robert, 1996. "Incomplete asset markets and the cross-country consumption correlation puzzle," Journal of Economic Dynamics and Control, Elsevier, vol. 20(5), pages 945-961, May.
  28. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, June.
  29. Eric Parrado & Andres Velasco, 2002. "Optimal Interest Rate Policy in a Small Open Economy," NBER Working Papers 8721, National Bureau of Economic Research, Inc.
  30. Philip R. Lane & Giovanni Ganelli, 2002. "Dynamic General Equilibrium Analysis: The Open Economy Dimension," Trinity Economics Papers 200212, Trinity College Dublin, Department of Economics.
  31. Faia, Ester, 2001. "Stabilization policy in a two country model and the role of financial frictions," Working Paper Series 0056, European Central Bank.
  32. Jess Gaspar & Kenneth L. Judd, 1997. "Solving Large Scale Rational Expectations Models," NBER Technical Working Papers 0207, National Bureau of Economic Research, Inc.
  33. Yun, Tack, 1996. "Nominal price rigidity, money supply endogeneity, and business cycles," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 345-370, April.
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