A Quantitative Perspective on Optimal Monetary Policy Cooperation between the US and the Euro Area
85 Pages Posted: 2 Apr 2008
Date Written: March 1, 2008
The objective of this paper is to examine the main features of optimal monetary policy cooperation within a micro-founded macroeconometric frame-work. First, using Bayesian techniques, we estimate a two-country dynamic stochastic general equilibrium (DSGE) model for the United States (US) and the euro area (EA). The main features of the new open economy macro-economics (NOEM) are embodied in our framework: in particular, imperfect exchange rate pass-through and incomplete financial markets inter-nationally. Each country model incorporates the wide range of nominal and real frictions found in the closed-economy literature: staggered price and wage settings, variable capital utilization and fixed costs in production. Then, using the estimated parameters and disturbances, we study the properties of the optimal monetary policy cooperation through welfare analysis, impulse responses and variance decompositions.
Keywords: DSGE models, Optimal monetary policy, new open economy macroeconomics, Bayesian estimation
JEL Classification: E4, E5, F4
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