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Price and Trade Effects of Exchange Rates Fluctuations and the Design of Policy Coordination

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  • COHEN, D.
  • WYPLOSZ, C.

Abstract

We analyze a two-country zone facing a joint inflationary shock and responding with coordinated and uncoordinated monetary and fiscal policies. We show that the standard presumption that the absence of coordination results in an excessive exchange rate appreciation of the zone with respect to the rest of the world hinges on a specific assumption: that within the two countries considered, the price effect of exchange rate fluctuations dominates the trade effects relatively to the corresponding effects vis-a-vis the rest of the world. If the relative hierarchy goes the other way around (as we argue is likely for EC countries), the standard conclusion is reversed, resulting in insufficiently active monetary and fiscal policies. The paper considers asymmetric shocks as well as monetary policy coordination.
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Suggested Citation

  • Cohen, D. & Wyplosz, C., 1990. "Price and Trade Effects of Exchange Rates Fluctuations and the Design of Policy Coordination," DELTA Working Papers 90-19, DELTA (Ecole normale supérieure).
    • Handle: RePEc:del:abcdef:90-19
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    Cited by:

    1. is not listed on IDEAS
    2. Cohen, Daniel, 1997. "How Will the Euro behave?," CEPR Discussion Papers 1673, C.E.P.R. Discussion Papers.
    3. Cohen, Daniel & Loisel, Olivier, 2001. "Why was the euro weak? Markets and policies," European Economic Review, Elsevier, vol. 45(4-6), pages 988-994, May.
    4. Charles Wyplosz & Jean Pisani- Ferry, 1990. "Les implications budgétaires de l'union monétaire," Revue de l'OFCE, Programme National Persée, vol. 33(1), pages 155-173.

    More about this item

    JEL classification:

    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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