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When Does Coordination Pay?

Listed author(s):
  • MILLER, M.
  • SALMON, M.

In a continuous time model of two symmetric open economies, with a floating exchange rate, we find that the pay-off to the policy coordination depends systematically on the heterogeneity of their inflation experience. While monetary policy coordination improves welfare when there is a common rate of underlying inflation, it exacerbates the `time-consistency' problem arising when there are differences. Since the principle of `certainty equivalence' applies to time-consistent policy in linear quadratic models, we are also able to give a stochastic interpretation of the deterministic results.

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File URL: http://www2.warwick.ac.uk/fac/soc/economics/research/workingpapers/1989-1994/twerp333.pdf
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Paper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 333.

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Length: 29 pages
Date of creation: 1989
Handle: RePEc:wrk:warwec:333
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Web page: http://www2.warwick.ac.uk/fac/soc/economics/

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  1. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-1176, December.
  2. Currie, David & Holtham, Gerald & Hughes, Gordon, 1989. "The Theory and Practice of International Policy Coordination: Does Coordination Pay?," CEPR Discussion Papers 325, C.E.P.R. Discussion Papers.
  3. Miller, Marcus & Salmon, Mark, 1984. "Dynamic Games and the Time Inconsistency of Optimal Policy in Open Economies," CEPR Discussion Papers 27, C.E.P.R. Discussion Papers.
  4. Rogoff, Kenneth, 1985. "Can international monetary policy cooperation be counterproductive?," Journal of International Economics, Elsevier, vol. 18(3-4), pages 199-217, May.
  5. Daniel Cohen & Philippe Michel, 1988. "How Should Control Theory Be Used to Calculate a Time-Consistent Government Policy?," Review of Economic Studies, Oxford University Press, vol. 55(2), pages 263-274.
  6. Marcus Miller, 1985. "Monetary stabilization policy in an open economy," International Finance Discussion Papers 262, Board of Governors of the Federal Reserve System (U.S.).
  7. Levine, Paul & Currie, David, 1987. "The design of feedback rules in linear stochastic rational expectations models," Journal of Economic Dynamics and Control, Elsevier, vol. 11(1), pages 1-28, March.
  8. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-491, June.
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