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International Capital Mobility and the Coordination of Monetary Rules

  • Nicholas Carlozzi
  • John B. Taylor

The paper develops a two-country model with flexible exchange rates and perfect capital mobility, for evaluating the alternative macroeconomic policy rules. Macroeconomic performance is measured in terms of fluctuations in inflation and output. Expectations are rational, and prices are sticky; wagesetting is staggered over time. The countries are linked by aggregate spending effects, relative price effects, and mark-up pricing arrangements. The modelis solved and analyzed through deterministic and stochastic simulation techniques. The results suggest that international capital mobility is not necessarily an impediment to efficient domestic macroeconomic performance. Changes in the expected appreciation or a depreciation of the exchange rate along with differentials between real interest rates in the two countries can permit macroeconomic performance in one country to be relatively independent of the policy rule chosen by the other country. The results depend on the particular parameter values used in the model and suggest the need for further econometric work to determine the size of these parameters.

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File URL: http://www.nber.org/papers/w1242.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1242.

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Date of creation: Dec 1983
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Publication status: published as Carlozzi, Nicholas and John B. Taylor. "International Capital Mobility andthe Coordination of Policy Rules," Exchange Rate Management Under Uncertainty, ed, by Jagdeep S. Bhandari, MIP Press, 1985.
Handle: RePEc:nbr:nberwo:1242
Note: EFG
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  1. Guillermo A. Calvo, 1983. "Staggered Contracts and Exchange Rate Policy," NBER Chapters, in: Exchange Rates and International Macroeconomics, pages 235-258 National Bureau of Economic Research, Inc.
  2. Ray C. Fair & John B. Taylor, 1980. "Solution and Maximum Likelihood Estimation of Dynamic Nonlinear Rational Expectations Models," Cowles Foundation Discussion Papers 564, Cowles Foundation for Research in Economics, Yale University.
  3. Bhandari, Jagdeep S., 1982. "Staggered wage setting and exchange rate policy in an economy with capital assets," Journal of International Money and Finance, Elsevier, vol. 1(1), pages 275-292, January.
  4. repec:nbr:nberre:0126 is not listed on IDEAS
  5. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February.
  6. Mussa, Michael, 1982. "A Model of Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 90(1), pages 74-104, February.
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