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Monetary Policy Coordination Revisited in a Two-Bloc DSGE Model

  • Paul Levine

    (University of Surrey)

  • Joseph Pearlman

    (London Metropolitan University)

  • Richard Pierse

    (University of Surrey)

We reassess the gains from monetary policy coordination within the confines of the canonical NOEM in the light of three issues. First, the literature uses a number of cooperative and non-cooperative equilibrium concepts that do not always clearly distinguish commitment and discretionary outcomes, and in some cases adopts inappropriate concepts. Second, our analysis is welfare based. Moreover, as with much of this literature, we adopt a linear-quadratic approximation of the actual non-linear non-quadratic stochastic optimization problem facing the monetary policymakers. Our second objective then is to re-assess welfare gains using an accurate approximation for such a problem, a feature that for the most part is lacking in previous studies. Finally, we examine the issue where the monetary authority is restricted to rules that are operational in two senses: first, the zero lower bound constraint is imposed on the optimal rule and second, we study simple Taylor-type commitment rules that unlike fully optimal rules are easily monitored by the public.

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Paper provided by School of Economics, University of Surrey in its series School of Economics Discussion Papers with number 0907.

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Length: 51 pages
Date of creation: Oct 2007
Date of revision:
Handle: RePEc:sur:surrec:0907
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