International dimensions of optimal monetary policy
By: Giancarlo Corsetti and Paolo Pesenti.
Contributors: Pesenti, Paolo A.; Federal Reserve Bank of New York.
Series: Staff reports ;; no. 124; Staff reports (Federal Reserve Bank of New York : Online) ;; no. 124.
Publisher: Federal Reserve Bank of New York
Published: 2001
Place of publication: [New York, N.Y.]
Language: eng
Format: Electronic resource
Subjects: Monetary policy -- Econometric models.; Exports -- Prices -- Econometric models.; Foreign exchange rates -- Econometric models.; Economics, economic history and consumer affairs
Genres: Econometric models.
Description: "This paper provides a baseline general-equilibrium model of optimal monetary policy among interdependent economies with monopolistic firms that set prices one period in advance.  Strict adherence to inward-looking policy objectives such as the stabilization of domestic output cannot be optimal when firms' markups are exposed to currency fluctuations.  Such policies induce excessive volatility in exchange rates and foreign sales revenue, leading exporters to set higher prices in response to higher profit risk.  In general, optimal rules trade off a larger domestic output gap against lower import prices.  Monetary rules in a world Nash equilibrium lead to less exchange rate volatility relative to both inward-looking rules and discretionary policies, even when the latter do not suffer from any inflationary (or deflationary) bias.  Gains from international monetary cooperation are related in an nonmonotonic way to the degree of exchange rate pass-through"--Federal Reserve Bank of New York web site.
Notes: Includes bibliographical references.
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