Policy Decentralisation and Exchange Rate Management in Interdependent Economies
The demise of Bretton Woods and of the short-lived Smithsonian agreement has raised questions about exchange rate management by monetary authorities acting in isolation from one another. For instance, will individual monetary authorities have an incentive to stabilise the exchange rate? To what extent will monetary actions abroad disrupt domestic monetary policy? What are the gains from co-ordinating monetary policy? The problems that arise when different agents pursue independent policies in interdependent economies have been explored by a number of authors. Aoki (1976), Cooper (1969), Hamada (1976), Allen and Kenen (1980), McFadden (1967), Patrick (1973), Kydland (1976) and Pindyck (1976), among others, have made significant contributions. Different authors have focused on different aspects of decentralized policy formation. One purpose of this paper is to provide a general discussion of decentralization. A second purpose of this paper is to analyse the optimal design of monetary policy in interdependent economies
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- Sargent, Thomas J & Wallace, Neil, 1975. ""Rational" Expectations, the Optimal Monetary Instrument, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 83(2), pages 241-54, April.
- Boyer, Russell S, 1978. "Optimal Foreign Exchange Market Intervention," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 1045-55, December.
- McCallum, B. T. & Whitaker, J. K., 1979. "The effectiveness of fiscal feedback rules and automatic stabilizers under rational expectations," Journal of Monetary Economics, Elsevier, vol. 5(2), pages 171-186, April.
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