A Simple Framework for International Monetary Policy Analysis

37 Pages Posted: 11 Jun 2002

See all articles by Richard Clarida

Richard Clarida

Columbia University - Graduate School of Arts and Sciences - Department of Eco; National Bureau of Economic Research (NBER)

Jordi Galí

Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI); Massachusetts Institute of Technology (MIT) - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Mark Gertler

New York University - Leonard N. Stern School of Business - Department of Economics; National Bureau of Economic Research (NBER)

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Date Written: April 2002

Abstract

We study the international monetary policy design problem within an optimizing two-country sticky price model, where each country faces a short run trade-off between output and inflation. The model is sufficiently tractable to solve analytically. We find that in the Nash equilibrium, the policy problem for each central bank is isomorphic to the one it would face if it were a closed economy. Gains from co-operation arise, however, that stem from the impact of foreign economic activity on the domestic marginal cost of production. While under Nash central banks need only adjust the interest rate in response to domestic inflation, under co-operation they should respond to foreign inflation as well. In either scenario, flexible exchange rates are desirable.

Keywords: International monetary policy, Nash equilibrium, co-operation, marginal cost

JEL Classification: E50, F30

Suggested Citation

Clarida, Richard H. and Gali, Jordi and Gertler, Mark, A Simple Framework for International Monetary Policy Analysis (April 2002). CEPR Discussion Paper No. 3555, Available at SSRN: https://ssrn.com/abstract=315668

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