Ramsey monetary policy and international relative prices

  • We analyze welfare maximizing monetary policy in a dynamic two-country model with price stickiness and imperfect competition. In this context, a typical terms of trade externality affects policy interaction between independent monetary authorities. Unlike the existing literature, we remain consistent to a public finance approach by an explicit consideration of all the distortions that are relevant to the Ramsey planner. This strategy entails two main advantages. First, it allows an accurate characterization of optimal policy in an economy that evolves around a steady-state which is not necessarily efficient. Second, it allows to describe a full range of alternative dynamic equilibria when price setters in both countries are completely forward-looking and households' preferences are not restricted. In this context, we study optimal policy both in the long-run and along a dynamic path, and we compare optimal commitment policy under Nash competition and under cooperation. By deriving a second order accurate solution to the policy functions, we also characterize the welfare gains from international policy cooperation. Klassifikation: E52, F41 . This version: January, 2004. First draft: October 2003 .

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Author:Ester FaiaGND, Tommaso Monacelli
Parent Title (German):Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 2004,04
Series (Serial Number):CFS working paper series (2004, 04)
Document Type:Working Paper
Year of Completion:2004
Year of first Publication:2004
Publishing Institution:Universit├Ątsbibliothek Johann Christian Senckenberg
Release Date:2005/06/13
Tag:Cooperation; Nash equilibrium; Optimal Monetary Policy; Ramsey planner; imperfect competition; sticky prices
GND Keyword:Geldpolitik
Issue:Version: January, 2004
Page Number:45
This version: January, 2004. First draft: October 2003 .
Institutes:Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
Licence (German):License LogoDeutsches Urheberrecht