Optimal Policy under Dollar Pricing

93 Pages Posted: 21 Jun 2019 Last revised: 18 Jan 2023

See all articles by Konstantin Egorov

Konstantin Egorov

Leibniz Institute for Financial Research SAFE

Dmitry Mukhin

London School of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: January 04, 2023

Abstract

Recent empirical evidence shows that most international prices are sticky in dollars. This paper studies the policy implications of this fact in the context of an open economy model, allowing for an arbitrary structure of asset markets, general preferences and technologies, time- or state-dependent price setting, and a rich set of shocks. We show that although monetary policy is less efficient and cannot implement the flexible-price allocation, inflation targeting remains robustly optimal in non-U.S. economies. The implementation of this non-cooperative policy results in a "global monetary cycle" with other countries importing the monetary stance of the U.S. The capital controls cannot unilaterally improve the allocation and are useful only when coordinated across countries. Thanks to the dominance of the dollar, the U.S. can extract rents in international goods and asset markets and enjoy a higher welfare than other economies. Although international cooperation benefits other countries by improving global demand for dollar-invoiced goods, it is not in the self-interest of the U.S. and may be hard to sustain.

Suggested Citation

Egorov, Konstantin and Mukhin, Dmitry, Optimal Policy under Dollar Pricing (January 04, 2023). SAFE Working Paper No. 377, Available at SSRN: https://ssrn.com/abstract=3404660 or http://dx.doi.org/10.2139/ssrn.3404660

Konstantin Egorov (Contact Author)

Leibniz Institute for Financial Research SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

Dmitry Mukhin

London School of Economics ( email )

WI
United Kingdom

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