Designing targeting rules for international monetary policy cooperation

Abstract

This study analyzes a two-country dynamic general equilibrium model with nominal rigidities, monopolistic competition and producer currency pricing. A quadratic approximation to the utility of the consumers is derived and assumed as the policy objective function of the policymakers. It is shown that only under special conditions there are no gains from cooperation and moreover that the paths of the exchange rate and prices in the constrained-efficient solution depend on the kind of disturbance that affects the economy. It might be the case either for fixed or floating exchange rates. Despite this result, simple targeting rules that involve only targets for the growth of output and for both domestic GDP and CPI inflation rates can replicate the cooperative allocation.

China, the Dollar Peg and U.S. Monetary Policy

“…They nd that a xed exchange rate results in a welfare loss of some 0.03% of initial consumption relative to the optimal monetary policy rule. Benigno and Benigno (2006) show that the o a t i n g( xed) exchange rate regime is desirable in cases of productivity (mark-up) shocks. The optimal exchange rate regime depends therefore on the type of disturbance.…”

“…In presenting the model that follows, if the equations are symmetric across countries, I present only the U.S. equation. 4 …”

Gasoline prices, transport costs, and the U.S. business cycles

“…7 Rotemberg and Woodford (1996), and Finn (2000). 6 The model builds upon models such as Benigno and Benigno (2006) by introducing a transportation sector that uses gasoline as an input. The model also extends the model of Yilmazkuday (2009) by endogenizing the transport costs through considering endogenously determined gasoline prices.…”

“…The results show that although standard shocks in the literature (e.g., technology shocks or monetary policy shocks) have signi…cant e¤ects on the U.S. business cycles in the long run, gasoline supply and demand shocks play an important role in the short run. 4 Some earlier DSGE studies have also considered energy prices (mostly in the form of oil prices) and their e¤ects on economic activity. 5 In the recent literature, Dhawan and Jeske (2008) have 1 See Kilian (2008); gasoline is followed by electricity with a share of 33.8% and natural gas with a share of 12.3%.…”

“…2 For example, crude oil is the main input into gasoline production. 3 A more detailed comparison between energy, oil, and gasoline prices has been provided in Kilian (2010) 4 See Kilian (2008) and Edelstein and Kilian (2009) for discussions on mechanisms that explain how consumption expenditures may be directly a¤ected by energy price changes. 5 As earlier modeling approaches, see Hamilton (1988), Kim and Loungani (1992), Backus and Crucini (1992), modeled (and calibrated) the energy consumption of households and …rms; however, they have and estimated the energy consumption of households and …rms; however, they have not considered the role of energy shocks through modeling a transportation sector, either.…”