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Cost-Push Shocks and Monetary Policy and Monetary Policy in Open Economies

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  • Sutherland, Alan

Abstract

This paper analyses the implications of cost-push shocks for the optimal choice of monetary policy target in an two-country sticky-price model. In addition to cost-push shocks, each country is subject to labour-supply and money-demand shocks. It is shown that the fully optimal coordinated policy can be supported by independent national monetary authorities following a policy of flexible inflation targeting. A number of simple (but non-optimal) targeting rules are compared. Strict producer-price targeting is found to be the best simple rule when the variance of cost-push shocks is small. Strict consumerprice targeting is best for intermediate levels of the variance of cost-push shocks. And nominal-income targeting is best when the variance of cost-push shocks in high. In general, money-supply targeting and fixed nominal exchange rates are found to yield less welfare than these other regimes.

Suggested Citation

  • Sutherland, Alan, 2002. "Cost-Push Shocks and Monetary Policy and Monetary Policy in Open Economies," Discussion Paper Series 1: Economic Studies 2002,27, Deutsche Bundesbank.
  • Handle: RePEc:zbw:bubdp1:4192
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    References listed on IDEAS

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    More about this item

    Keywords

    monetary policy; inflation targeting; welfare;

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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