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Credibility and Commitment of Monetary Policy in Open Economies

In this paper we study the delegation of monetary policy to independent central bankers in a two country world with monetary spill-overs. The paper shows that under imperfect commitment and private information of the Central Bankers about their objectives the optimal degree of commitment depends on the correlation structure of the shock hitting the economies. When the correlation of the shocks across countries is negative, as when the variance to output depends mainly on shocks to the terms of trade, there exist strategic complementarity in the optimal degree of commitment. When the correlation of shocks is positive (common technological or demand shocks) there exist strategic substitutability. These result may provide rationale for the simultaneous increasing attention to the institutional solution to the credibility problem in monetary policy in most advanced countries in the last decades.

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Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 47.

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Date of creation: 01 Sep 2000
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Publication status: Published in European Journal of Political Economy, 2003, vol. 21, pages 872-902
Handle: RePEc:sef:csefwp:47
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  1. Giancarlo Corsetti & Paolo Pesenti, 2001. "International dimensions of optimal monetary policy," Staff Reports 124, Federal Reserve Bank of New York.
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