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Optimal Monetary Policy in an Estimated Local Currency Pricing Model

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  • Okano, Eiji
  • Eguchi, Masataka
  • Gunji, Hiroshi
  • Miyazaki, Tomomi

Abstract

We analyze fluctuations in inflation and the nominal exchange rate under optimal monetary policy with local currency pricing by developing two-country DSGE local currency pricing and producer currency pricing models. We estimate our models using Bayesian techniques with Japanese and US data, and calculate impulse response functions. Our estimation results show that local currency pricing is strongly supported against producer currency pricing. From the estimated parameters, we show that completely stabilizing consumer price index inflation is optimal from the viewpoint of minimizing welfare costs and that completely stabilizing consumer price index inflation is consistent with completely stabilizing the nominal exchange rate.

Suggested Citation

  • Okano, Eiji & Eguchi, Masataka & Gunji, Hiroshi & Miyazaki, Tomomi, 2012. "Optimal Monetary Policy in an Estimated Local Currency Pricing Model," Discussion Paper Series 558, Institute of Economic Research, Hitotsubashi University.
  • Handle: RePEc:hit:hituec:558
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    File URL: http://hermes-ir.lib.hit-u.ac.jp/hermes/ir/re/22136/DP558.pdf
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    References listed on IDEAS

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    Cited by:

    1. Kaufmann, Christoph, 2019. "Optimal fiscal substitutes for the exchange rate in monetary unions," Journal of Economic Dynamics and Control, Elsevier, vol. 103(C), pages 43-62.

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    More about this item

    Keywords

    local currency pricing; optimal monetary policy; CPI inflation; fixed exchange rate; Bayesian estimation;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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