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Do the ECB and the Fed really need to cooperate? Optimal monetary policy in a two-country world

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  • Pappa, Evi

Abstract

A two-country model with monopolistic competition and price stickiness is employed to investigate the implications for macroeconomic stability and the welfare properties of three international policy arrangements: (a) cooperative, (b) non-cooperative and (c) monetary union. I characterize the conditions under which there is scope for policy cooperation and quantify the costs of non cooperation and monetary union. The non-cooperative equilibrium may be suboptimal because of beggar-thy-neighbor and beggar-thyself effects, while monetary union may be suboptimal because of the sluggishness of relative prices. Both the costs of policy competition and of a monetary union are sensitive to the values assumed for the intertemporal and international demand elasticity and the degree of openness of the economy. Independently of the calibration scenario adopted, the ECB has little to gain by coordinating with the Fed.

Suggested Citation

  • Pappa, Evi, 2004. "Do the ECB and the Fed really need to cooperate? Optimal monetary policy in a two-country world," LSE Research Online Documents on Economics 512, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:512
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    Keywords

    International policy arrangements; terms of trade; openness; international demand elastcity; intertemporal demand elasticity; optimal monetary policy. JEL classification codes : E52; F41; F42;

    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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