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Optimal monetary and tariff policy in open economies

  • 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 investigates the relationship between optimal monetary and tariff policy in open economies. In producer-currency pricing (PCP) case, as in Obstfeld and Rogoff (2002), optimal tariff policy rules are separable from optimal monetary policy rules. Except for PCP case, they are not separable from each other. The increase of tariffs will lead to a more insulated world economy in the sense that both home and foreign pay more attention to their domestic goals respectively. When tariffs are chosen optimally, except for PCP and reference-currency pricing (RCP) cases, optimal monetary policy is inward-looking. We also extend the model to consider gains from cooperation. Except for LCP case, there are gains from cooperation between Home and Foreign monetary policy makers. By comparison, there are gains from cooperation between Home and Foreign tariff policy makers in various cases.

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Paper provided by China Economics and Management Academy, Central University of Finance and Economics in its series CEMA Working Papers with number 587.

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Length: 28 pages
Date of creation: 28 Jul 2013
Date of revision:
Handle: RePEc:cuf:wpaper:587
Contact details of provider: Web page: http://cema.cufe.edu.cn/

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  1. Gianluca Benigno & Pierpaolo Benigno, 2003. "Price Stability in Open Economies," Review of Economic Studies, Oxford University Press, vol. 70(4), pages 743-764.
  2. 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.
  3. Obstfeld, Maurice & Rogoff, Kenneth, 2001. "Global Implications of Self-Oriented National Monetary Rules," Center for International and Development Economics Research, Working Paper Series qt6412m5b7, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
  4. Obstfeld, Maurice & Rogoff, Kenneth, 1995. "Exchange Rate Dynamics Redux," CEPR Discussion Papers 1131, C.E.P.R. Discussion Papers.
  5. Giancarlo Corsetti & Paolo Pesenti, 2001. "International dimensions of optimal monetary policy," Staff Reports 124, Federal Reserve Bank of New York.
  6. Charles Engel, 2009. "Currency Misalignments and Optimal Monetary Policy: A Re-examination," RBA Research Discussion Papers rdp2009-01, Reserve Bank of Australia.
  7. 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.
  8. 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.
  9. Obstfeld, Maurice & Rogoff, Kenneth, 1999. "New Directions for Stochastic Open Economy Models," Center for International and Development Economics Research, Working Paper Series qt5pf7g8sh, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
  10. Jordi Gal� & 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.
  11. Heng-fu Zou, 1995. "Short-run analysis of fiscal policy and the current account in a finite horizon model," CEMA Working Papers 95, China Economics and Management Academy, Central University of Finance and Economics.
  12. Zou, Heng-Fu, 1993. "Dollarization and inflation in a two-country optimization model," Journal of International Money and Finance, Elsevier, vol. 12(2), pages 209-220, April.
  13. 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.
  14. Benigno, Pierpaolo, 2004. "Optimal monetary policy in a currency area," Journal of International Economics, Elsevier, vol. 63(2), pages 293-320, July.
  15. 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.
  16. Akerlof, George A & Yellen, Janet L, 1985. "A Near-rational Model of the Business Cycle, with Wage and Price Intertia," The Quarterly Journal of Economics, MIT Press, vol. 100(5), pages 823-38, Supp..
  17. Giancarlo Corsetti & Paolo Pesenti, 1997. "Welfare and Macroeconomic Interdependence," NBER Working Papers 6307, National Bureau of Economic Research, Inc.
  18. 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.
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