Journal article

Optimal monetary policy in open economies revisited

I Fujiwara, J WANG

Journal of International Economics | Elsevier | Published : 2017


This paper revisits optimal monetary policy in open economies, in particular, focusing on the noncooperative policy game under local currency pricing in a two-country dynamic stochastic general equilibrium model. We first derive the quadratic loss functions which noncooperative policy makers aim to minimize. Then, we show that noncooperative policy makers face extra trade-offs regarding stabilizing real marginal costs induced by deviations from the law of one price under local currency pricing, and that optimal monetary policy seeks to stabilize CPI inflation rates and more so under noncooperation than it does under cooperation. As a result of the increased number of stabilizing objectives, ..

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Awarded by Australian Research Council

Funding Acknowledgements

We thank the Editor, Charles Engel and two anonymous referees for many useful comments. We also have benefited from discussions with Kosuke Aoki, Pierpaolo Benigno, Richard Dennis, Mick Devereux, Jinill Kim, Warwick McKibbin and seminar participants at the Australian National University and the University of Melbourne. Fujiwara is grateful for financial support from JSPS KAKENHI Grant-in-Aid for Scientific Research (A) Grant Number 15H01939. Wang is grateful for financial support from Australian Research Council Discovery Project 160102654.