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Financial Stability in Open Economies

  • Ippei Fujiwara
  • Yuki Teranishi

Do financial frictions call for policy cooperation? This paper investigates the implications of financial frictions for monetary policy in the open economy. Welfare analysis shows that there are long-run gains which result from cooperation, but, dynamically, financial frictions per se do not require policy cooperation to improve global welfare over business cycles. In addition, inward-looking financial stability, namely eliminating inefficient fluctuations of loan premiums in its own country, is the optimal monetary policy in the open economy, irrespective of the existence of policy coordination.

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File URL: https://cama.crawford.anu.edu.au/sites/default/files/publication/cama_crawford_anu_edu_au/2013-10/71_fujiwara_teranishi.pdf
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Paper provided by Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University in its series CAMA Working Papers with number 2013-71.

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Length: 64 pages
Date of creation: Oct 2013
Date of revision:
Handle: RePEc:een:camaaa:2013-71
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