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Policy Analysis With a Multicountry Model

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  • John B. Taylor

Abstract

This paper summarizes the results of an empirical study of alternative international monetary arrangements using a multicountry, rational expectations, econometric model of the G-7 countries; Canada, France, Germany, Italy, Japan, the United Kingdom and the United States. The model is fit to quarterly data and the effect of different monetary rules on the performance of the economy is determined by stochastic simulations of the estimated model. The results indicate that, with the current international economic structure, internal stability as well as external stability would be greater if Germany, Japan and the United States oriented their monetary policies toward domestic price stability, or perhaps towards domestic nominal GNP stability, rather than towards fixing the exchange rates between them. Empirical measures of demand and supply elasticities and of the average size of the shocks to the demand and supply curves are used in the analysis. Thus the advantage that one international monetary arrangement has for dealing with one type of shock is assessed and measured up against the advantage that another arrangement has for dealing with other types of shocks. It turns out that in this assessment a more flexible exchange rate system between Germany, Japan, and the United States does better than a fixed exchange rate system.

Suggested Citation

  • John B. Taylor, 1989. "Policy Analysis With a Multicountry Model," NBER Working Papers 2881, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:2881
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    References listed on IDEAS

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    1. John B. Taylor, 1986. "An econometric evaluation of international monetary policy rules: fixed versus flexible exchange rates," Proceedings, Federal Reserve Bank of San Francisco.
    2. Taylor, John B., 1985. "International coordination in the design of macroeconomic policy rules," European Economic Review, Elsevier, vol. 28(1-2), pages 53-81.
    3. Nicholas Carlozzi & John B. Taylor, 1983. "International Capital Mobility and the Coordination of Monetary Rules," NBER Working Papers 1242, National Bureau of Economic Research, Inc.
    4. Taylor, John B, 1979. "Estimation and Control of a Macroeconomic Model with Rational Expectations," Econometrica, Econometric Society, vol. 47(5), pages 1267-1286, September.
    5. Mckibbin, Warwick J. & Sachs, Jeffrey D., 1988. "Comparing the global performance of alternative exchange arrangements," Journal of International Money and Finance, Elsevier, vol. 7(4), pages 387-410.
    6. Marcus H. Miller & John Williamson, 1991. "The International Monetary System: An Analysis of Alternative Regimes," NBER Chapters,in: International Volatility and Economic Growth: The First Ten Years of The International Seminar on Macroeconomics, pages 279-302 National Bureau of Economic Research, Inc.
    7. McKinnon, Ronald I, 1988. "Monetary and Exchange Rate Policies for International Financial Stability: A Proposal," Journal of Economic Perspectives, American Economic Association, vol. 2(1), pages 83-103, Winter.
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    Cited by:

    1. Fair, Ray C & Taylor, John B, 1990. "Full Information Estimation and Stochastic Simulation of Models with Rational Expectations," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 5(4), pages 381-392, Oct.-Dec..

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