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dc.contributor.authorEvers, Michael P.en_US
dc.description.abstractIn the literature on international monetary policy, the paradigm is that gains from coordination are fairly small. Monetary policy is conducted to stabilize macroeconomic fluctuations and gains from policy coordination arise from preventing national monetary authorities from strategically manipulating the terms of trade by means of these stabilization policy instruments. However, as it has been emphasized by \cite{lucas:2003a}, welfare gains from stabilizing fluctuations are generically small since they are of second order. In this paper, I develop a dynamic stochastic two-country model with sticky wages and a cash-in-advance restriction which is in the spirit of the New Open Economy Macroeconomics framework. In this environment, monetary authorities can manipulate the terms of trade by conducting a general short-run monetary policy using both the nominal interest rate and the money supply. The money supply affects the terms of trade by altering the nominal exchange rate ex post and it is used in the traditional way so as to stabilize macroeconomic fluctuations. The nominal interest rate affects the terms of trade by changing expected inflation ex ante. Self-oriented national policymakers use the nominal interest rates to raise the terms of trade ex ante. This leads to an inefficient inflation tax whose welfare effects are of first order. Consequently, gains from monetary policy coordination are of first order.en_US
dc.publisher|aGraduate School of Economics|cBonnen_US
dc.relation.ispartofseries|aBonn econ discussion papers|x2007,10en_US
dc.subject.keywordInternational Policy Coordinationen_US
dc.subject.keywordGeneral Short-Run Monetary Policyen_US
dc.subject.keywordNew Open Economy Macroeconomicsen_US
dc.subject.stwTerms of Tradeen_US
dc.subject.stwInternationale wirtschaftspolitische Koordinationen_US
dc.subject.stwNeue Makroökonomik offener Volkswirtschaftenen_US
dc.titleOptimal monetary policy in an independent worlden_US
dc.type|aWorking Paperen_US

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