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Optimal monetary and tariff policy in open economies

Author

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  • 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)

Abstract

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.

Suggested Citation

  • 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.
  • Handle: RePEc:cuf:wpaper:587
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    References listed on IDEAS

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    14. Chan Wang & Heng-fu Zou, 2013. "On the efficiency of monetary and fiscal policy in open economies," Annals of Economics and Finance, Society for AEF, vol. 14(1), pages 179-206, May.
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    Cited by:

    1. Chan Wang & Heng-fu Zou, 2013. "Optimal monetary policy in open economies: the role of reference currency in vertical production and trade," CEMA Working Papers 586, China Economics and Management Academy, Central University of Finance and Economics.

    More about this item

    Keywords

    Open economies; Tariff policy; Monetary policy; Exchange rate pass-through elasticity; International cooperation;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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