WHEN DOES COORDINATION PAY?

In a continuous time model of two symmetric open economies, with a floating exchange rate, we find that the pay-off to macroeconomic policy coordination depends systematically on how heterogeneous is their inflation experience. While monetary policy coordination improves welfare in handling a common rate of underlying inflation, it exacerbates the "time consistency" problem arising when there are differences (as is illustrated diagrammatically). Since the principle of "certainty equivalence" applies to time consistent policy in linear quadratic models, we are also able to give a stochastic interpretation of the deterministic results.


Issue Date:
Dec 12 1989
Publication Type:
Working or Discussion Paper
Record Identifier:
http://ageconsearch.umn.edu/record/268367
Language:
English
Total Pages:
32
JEL Codes:
133; 134; 325




 Record created 2018-02-15, last modified 2018-02-15

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