Inflation in Open Economies with Complete Markets

27 Pages Posted: 9 Jun 2004

See all articles by Marco Celentani

Marco Celentani

Universidad Carlos III de Madrid - Department of Economics

J. Ignacio Conde-Ruiz

Foundation for Applied Economic Research (FEDEA)

Klaus Desmet

Southern Methodist University (SMU); Centre for Economic Policy Research (CEPR)

Date Written: May 2004

Abstract

This Paper uses an overlapping generations model to analyse monetary policy in a two-country model with asymmetric shocks. Agents insure against risk through the exchange of a complete set of real securities. Each central bank is able to commit to the contingent monetary policy rule that maximizes domestic welfare. In an attempt to improve their country's terms of trade of securities, central banks may choose to commit to costly inflation in favourable states of nature. In equilibrium, the effects on the terms of trade wash out, leaving both countries worse off. Countries facing asymmetric shocks may, therefore, gain from monetary cooperation.

Keywords: Inflation, risk sharing, security markets, terms of trade, monetary cooperation, currency union

JEL Classification: E50, F30, F42

Suggested Citation

Celentani, Marco and Conde-Ruiz, J. Ignacio and Desmet, Klaus, Inflation in Open Economies with Complete Markets (May 2004). CEPR Discussion Paper No. 4385. Available at SSRN: https://ssrn.com/abstract=556129

Marco Celentani

Universidad Carlos III de Madrid - Department of Economics ( email )

Calle Madrid 126
Getafe, 28903
Spain
+34-91-624 9546 (Phone)
+34-91-624 9875 (Fax)

J. Ignacio Conde-Ruiz

Foundation for Applied Economic Research (FEDEA) ( email )

Jorge Juan 46
Madrid, 28001
Spain
+34 91 435 9020 (Phone)
+34 91 577 9575 (Fax)

Klaus Desmet (Contact Author)

Southern Methodist University (SMU) ( email )

6212 Bishop Blvd.
Dallas, TX 75275
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
13
Abstract Views
726
PlumX Metrics