IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this paper

Optimal monetary policy in open economies: the role of reference currency in vertical production and trade

  • Chan Wang

    (China Economics and Management Academy, Central University of Finance and Economics)

  • Heng-fu Zou

    (China Economics and Management Academy, Central University of Finance and Economics
    Institute for Advanced Study, Wuhan University
    Institute for Advanced Study, Shenzhen University)

This paper examines optimal monetary policy rules in open economies with vertical production and trade in which we emphasize the role played by reference currency. As evidenced by empirical ï¬ ndings, we assume ï¬ nal goods prices are sticky, but intermediate goods prices are flexible. We ï¬ nd that the asymmetry of exporters' pricing behavior implies that the responses of monetary authorities to productivity shocks from the stage of ï¬ nal goods production are asymmetric but symmetric to productivity shocks from the stage of intermediate goods production. We also ï¬ nd that gains from cooperation are related to the covariance of productivity shocks in two stages. In addition, we give the conditions under which home and foreign are willing to take part in cooperation respectively. As for exchange rate policy, we ï¬ nd that the volatility of nominal exchange rate in RCP case is greater than that in LCP case, but smaller than that in PCP case. The volatility of real exchange rate in RCP case is, however, greater than those in PCP and LCP cases.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://down.aefweb.net/WorkingPapers/w586.pdf
Download Restriction: no

Paper provided by China Economics and Management Academy, Central University of Finance and Economics in its series CEMA Working Papers with number 586.

as
in new window

Length: 21 pages
Date of creation: 28 Jul 2013
Date of revision:
Handle: RePEc:cuf:wpaper:586
Contact details of provider: Web page: http://cema.cufe.edu.cn/

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Linda S. Goldberg & Cedric Tille, 2005. "Vehicle currency use in international trade," Staff Reports 200, Federal Reserve Bank of New York.
  2. Goldberg, Linda S. & Tille, Cédric, 2008. "Macroeconomic Interdependence and the International Role of the Dollar," CEPR Discussion Papers 6704, C.E.P.R. Discussion Papers.
  3. Kang Shi & Juanyi Xu, 2007. "Optimal Monetary Policy with Vertical Production and Trade," Review of International Economics, Wiley Blackwell, vol. 15(3), pages 514-537, 08.
  4. Robert C. Feenstra, . "Integration Of Trade And Disintegration Of Production In The Global Economy," Department of Economics 98-06, California Davis - Department of Economics.
  5. Todd E. Clark, 1999. "The Responses Of Prices At Different Stages Of Production To Monetary Policy Shocks," The Review of Economics and Statistics, MIT Press, vol. 81(3), pages 420-433, August.
  6. Maurice Obstfeld and Kenneth Rogoff., 2001. "Global Implications of Self-Oriented National Monetary Rules," Center for International and Development Economics Research (CIDER) Working Papers C01-120, University of California at Berkeley.
  7. Emmanuel Farhi & Gita Gopinath & Oleg Itskhoki, . "Fiscal Devaluations," Working Paper 70976, Harvard University OpenScholar.
  8. Obstfeld, Maurice & Rogoff, Kenneth, 1995. "Exchange Rate Dynamics Redux," Center for International and Development Economics Research (CIDER) Working Papers 233403, University of California-Berkeley, Department of Economics.
  9. Jordi Galí & Tommaso Monacelli, 2005. "Monetary Policy and Exchange Rate Volatility in a Small Open Economy," Review of Economic Studies, Oxford University Press, vol. 72(3), pages 707-734.
  10. Clarida, Richard & Gali, Jordi & Gertler, Mark, 2002. "A simple framework for international monetary policy analysis," Journal of Monetary Economics, Elsevier, vol. 49(5), pages 879-904, July.
  11. Maurice Obstfeld & Kenneth Rogoff, 2000. "New Directions for Stochastic Open Economy Models," International Finance 0004002, EconWPA.
  12. Charles Engel, 2009. "Currency Misalignments and Optimal Monetary Policy: A Reexamination," NBER Working Papers 14829, National Bureau of Economic Research, Inc.
  13. Gita Gopinath & Oleg Itskhoki & Roberto Rigobon, 2010. "Currency Choice and Exchange Rate Pass-Through," American Economic Review, American Economic Association, vol. 100(1), pages 304-36, March.
  14. Bridgman, Benjamin, 2012. "The rise of vertical specialization trade," Journal of International Economics, Elsevier, vol. 86(1), pages 133-140.
  15. Kei-Mu Yi, 2000. "Can vertical specialization explain the growth of world trade?," Staff Reports 96, Federal Reserve Bank of New York.
  16. V. V Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2002. "Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates?," Review of Economic Studies, Oxford University Press, vol. 69(3), pages 533-563.
  17. Betts, Caroline & Devereux, Michael B., 2000. "Exchange rate dynamics in a model of pricing-to-market," Journal of International Economics, Elsevier, vol. 50(1), pages 215-244, February.
  18. Giancarlo Corsetti & Paolo Pesenti, 2001. "International dimensions of optimal monetary policy," Staff Reports 124, Federal Reserve Bank of New York.
  19. Devereux, Michael B. & Shi, Kang & Xu, Juanyi, 2007. "Global monetary policy under a dollar standard," Journal of International Economics, Elsevier, vol. 71(1), pages 113-132, March.
  20. Pedro Teles & Isabel Correia & Bernardino Adao, 2007. "On the Relevance of Exchange Rate Regimes for Stabilization Policy," 2007 Meeting Papers 616, Society for Economic Dynamics.
  21. Zou, Heng-Fu, 1994. "Short-run analysis of fiscal policy and the current account in a finite horizon model," Journal of Macroeconomics, Elsevier, vol. 16(2), pages 347-357.
  22. David L. Hummels & Dana Rapoport & Kei-Mu Yi, 1998. "Vertical specialization and the changing nature of world trade," Economic Policy Review, Federal Reserve Bank of New York, issue Jun, pages 79-99.
  23. Heng-fu Zou, 1995. "Dollarization and inflation in a two-country optimization model," CEMA Working Papers 96, China Economics and Management Academy, Central University of Finance and Economics.
  24. José Manuel Campa & Linda S. Goldberg, 2005. "Exchange Rate Pass-Through into Import Prices," The Review of Economics and Statistics, MIT Press, vol. 87(4), pages 679-690, November.
  25. Pappa, Evi, 2004. "Do the ECB and the fed really need to cooperate? Optimal monetary policy in a two-country world," Journal of Monetary Economics, Elsevier, vol. 51(4), pages 753-779, May.
  26. Benigno, Pierpaolo, 2001. "Optimal Monetary Policy in a Currency Area," CEPR Discussion Papers 2755, C.E.P.R. Discussion Papers.
  27. Tille, Cedric, 2001. "The role of consumption substitutability in the international transmission of monetary shocks," Journal of International Economics, Elsevier, vol. 53(2), pages 421-444, April.
  28. Hummels, David & Ishii, Jun & Yi, Kei-Mu, 2001. "The nature and growth of vertical specialization in world trade," Journal of International Economics, Elsevier, vol. 54(1), pages 75-96, June.
  29. Giancarlo Corsetti & Paolo Pesenti, 1997. "Welfare and Macroeconomic Interdependence," NBER Working Papers 6307, National Bureau of Economic Research, Inc.
  30. Canzoneri, Matthew B. & Cumby, Robert E. & Diba, Behzad T., 2005. "The need for international policy coordination: what's old, what's new, what's yet to come?," Journal of International Economics, Elsevier, vol. 66(2), pages 363-384, July.
  31. Chan Wang & Heng-fu Zou, 2012. "On the efficiency of monetary and fiscal policy in open economies," CEMA Working Papers 534, China Economics and Management Academy, Central University of Finance and Economics.
  32. Dellas, Harris, 2006. "Monetary policy in open economies," European Economic Review, Elsevier, vol. 50(6), pages 1471-1486, August.
  33. Chan Wang & Heng-fu Zou, 2013. "Optimal monetary and tariff policy in open economies," CEMA Working Papers 587, China Economics and Management Academy, Central University of Finance and Economics.
  34. Gianluca Benigno & Pierpaolo Benigno, 2003. "Price Stability in Open Economies," Review of Economic Studies, Oxford University Press, vol. 70(4), pages 743-764.
  35. Mark Bils & Peter J. Klenow, 2002. "Some Evidence on the Importance of Sticky Prices," NBER Working Papers 9069, National Bureau of Economic Research, Inc.
  36. Emi Nakamura & Jón Steinsson, 2008. "Five Facts about Prices: A Reevaluation of Menu Cost Models," The Quarterly Journal of Economics, Oxford University Press, vol. 123(4), pages 1415-1464.
  37. Kevin M. Murphy & Andrei Shleifer & Robert W. Vishny, 1989. "Building Blocks of Market Clearing Business Cycle Models," NBER Working Papers 3004, National Bureau of Economic Research, Inc.
  38. Shi, Kang & Xu, Juanyi, 2010. "Twin dollarization and exchange rate policy," Journal of International Economics, Elsevier, vol. 81(1), pages 109-121, May.
  39. Huang, Kevin X.D. & Liu, Zheng, 2006. "Sellers' local currency pricing or buyers' local currency pricing: does it matter for international welfare analysis?," Journal of Economic Dynamics and Control, Elsevier, vol. 30(7), pages 1183-1213, July.
  40. Hau, Harald, 2000. "Exchange rate determination: The role of factor price rigidities and nontradeables," Journal of International Economics, Elsevier, vol. 50(2), pages 421-447, April.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:cuf:wpaper:586. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Qiang Gao)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.