Price Stability with Imperfect Financial Integration
49 Pages Posted: 3 Jun 2001
There are 2 versions of this paper
Price Stability with Imperfect Financial Integration
Price Stability with Imperfect Financial Integration
Abstract
This paper evaluates the welfare implications of policy rules when international financial markets are incomplete. Using a two-country dynamic general equilibrium model with incomplete markets, price stickiness and monopolistic competition, one finds that an allocation in which the producer inflation rates in both countries are stabilized to zero reproduces the flexible-price allocation. However, this allocation is sub-optimal with deadweight losses evaluated around 0.05 percent of a permanent shift in steady-state consumption. A state-contingent producer inflation policy is the feasible first-best. But, the gains from pursuing this policy instead of price stability are small in terms of reduction in the deadweight losses. Therefore, under incomplete markets, price stability is a good approximation of the feasible first best policy.
JEL Classification: E31, E32, F41, F42
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
By Maurice Obstfeld and Alan C. Stockman
-
By Maurice Obstfeld and Kenneth Rogoff
-
Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates?
By Varadarajan V. Chari, Patrick J. Kehoe, ...
-
Monetary Policy and Exchange Rate Volatility in a Small Open Economy
By Jordi Galí and Tommaso Monacelli
-
Monetary Policy and Exchange Rate Volatility in a Small Open Economy
By Jordi Galí and Tommaso Monacelli
-
Monetary Policy and Exchange Rate Volatility in a Small Open Economy
By Jordi Galí and Tommaso Monacelli
-
New Directions for Stochastic Open Economy Models
By Maurice Obstfeld and Kenneth Rogoff
-
Monetary Policy in the Open Economy Revisited: Price Setting and Exchange Rate Flexibility