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A Simple Framework for International Monetary Policy Analysis

  • Richard Clarida
  • Jordi Gali
  • Mark Gertler

We study the international monetary policy design problem within an optimizing two-country sticky price model, where each country faces a short run tradeoff between output and inflation. The model is sufficiently tractable to solve analytically. We find that in the Nash equilibrium, the policy problem for each central bank is isomorphic to the one it would face if it were a closed economy. Gains from cooperation arise, however, that stem from the impact of foreign economic activity on the domestic marginal cost of production. While under Nash central banks need only adjust the interest rate in response to domestic inflation, under cooperation they should respond to foreign inflation as well. In either scenario, flexible exchange rates are desirable.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8870.

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Date of creation: Apr 2002
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Publication status: published as Clarida, Richard, Jordi Gali and Mark Gertler. "A Simple Framework For International Monetary Policy Analysis," Journal of Monetary Economics, 2002, v49(5,Jul), 879-904.
Handle: RePEc:nbr:nberwo:8870
Note: ME
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