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International Policy Coordination and Simple Monetary Policy Rules

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  • Wolfram Berger
  • Helmut Wagner

Abstract

This paper studies the optimal design of monetary policy in an optimizing two-country sticky price model. We suppose that the production sequence of final consumption goods stretches across both countries and is associated with vertical trade. Prices of final consumption goods are sticky in the consumer's currency. Pursuing an inward-looking policy, as suggested in recent work, is not optimal in this set-up. We also ask which simple, i.e. non-optimal, targeting rule best supports the welfare maximizing policy. The results hinge critically on the degree of price flexibility and the relative importance of cost-push and productivity shocks. In many cases, a strict targeting of price indices like producer or consumer price indices is dominated by rules that allow for some fluctuations in prices such as nominal income or monetary targeting.

Suggested Citation

  • Wolfram Berger & Helmut Wagner, 2006. "International Policy Coordination and Simple Monetary Policy Rules," IMF Working Papers 06/164, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:06/164
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Central banks and their policies; Prices; Monetary policy; policy coordination; policy rule; consumer price targeting; producer price targeting; nominal income targeting; intermediate goods; optimal monetary policy; monetary targeting; money supply; Open Economy Macroeconomics; International Policy Coordination and Transmission;

    JEL classification:

    • 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
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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