Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/60708
Authors: 
Corsetti, Giancarlo
Pesenti, Paolo
Year of Publication: 
2001
Series/Report no.: 
Staff Report, Federal Reserve Bank of New York 124
Abstract: 
This paper provides a baseline general-equilibrium model of optimal monetary policy among interdependent economies with monopolistic firms that set prices one period in advance. Strict adherence to inward-looking policy objectives such as the stabilization of domestic output cannot be optimal when firms' markups are exposed to currency fluctuations. Such policies induce excessive volatility in exchange rates and foreign sales revenue, leading exporters to set higher prices in response to higher profit risk. In general, optimal rules trade off a larger domestic output gap against lower import prices. Monetary rules in a world Nash equilibrium lead to less exchange rate volatility relative to both inward-looking rules and discretionary policies, even when the latter do not suffer from any inflationary (or deflationary) bias. Gains from international monetary cooperation are related in an nonmonotonic way to the degree of exchange rate pass-through.
Subjects: 
optimal cyclical monetary policy, nominal rigidities, exchange rate pass-through, international cooperation
JEL: 
E31
E52
F42
Document Type: 
Working Paper

Files in This Item:
File
Size
280.73 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.