Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/153292
Authors: 
Coenen, Günter
Lombardo, Giovanni
Smets, Frank
Straub, Roland
Year of Publication: 
2008
Series/Report no.: 
ECB Working Paper 858
Abstract: 
We use a version of the New Area-Wide Model (NAWM) developed at the ECB in order to quantify the gains from monetary policy cooperation. The model is calibrated in order to match a set of empirical moments. We then derive the cooperative and (open-loop) Nash monetary policies, assuming that the central banks’ objectives is to maximize the welfare of the households. Our results show that given the current degree of openness of the US and euro area economies, the gains from monetary policy coordination are small, amounting to 0.03 percent of steady-state consumption. Nevertheless, the gains appear to be sensitive to the degree of openness and further economic integration between the two regions could generate sizable gains from cooperation. For example, increasing the trade shares to 32 percent of GDP in both regions, the gains from cooperation rise to about 1 percent of steady-state consumption. By decomposing the sources of the gains from cooperation with respect to the various shocks, we show that mark-up shocks are the most important source for gains from international monetary policy cooperation.
Subjects: 
DSGE
International Policy Coordination
New Area Wide Model
two-country model
JEL: 
E32
F41
F42
Document Type: 
Working Paper

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