International Policy Coordination and Simple Monetary Policy Rules

28 Pages Posted: 26 Jul 2006

See all articles by Wolfram Berger

Wolfram Berger

Fernuniversitaet Hagen

Helmut Wagner

University of Hagen (Fernuniversitaet Hagen)

Date Written: June 2006

Abstract

This paper studies the optimal design of monetary policy in an optimizing two-country sticky price model. We suppose that the production sequence of final consumption goods stretches across both countries and is associated with vertical trade. Prices of final consumption goods are sticky in the consumer`s currency. Pursuing an inward-looking policy, as suggested in recent work, is not optimal in this set-up. We also ask which simple, i.e. non-optimal, targeting rule best supports the welfare maximizing policy. The results hinge critically on the degree of price flexibility and the relative importance of cost-push and productivity shocks. In many cases, a strict targeting of price indices like producer or consumer price indices is dominated by rules that allow for some fluctuations in prices such as nominal income or monetary targeting.

Keywords: policy coordination, policy rule, consumer price targeting, producer price targeting, nominal income targeting

JEL Classification: F41, F42, E52, E58

Suggested Citation

Berger, Wolfram and Wagner, Helmut, International Policy Coordination and Simple Monetary Policy Rules (June 2006). IMF Working Paper No. 06/164, Available at SSRN: https://ssrn.com/abstract=920256

Wolfram Berger (Contact Author)

Fernuniversitaet Hagen ( email )

Universitätsstrasse 41
Feithstrathe 140
D-58084 Hagen
Germany

Helmut Wagner

University of Hagen (Fernuniversitaet Hagen) ( email )

Universitätsstrasse 41
Feithstrathe 140
D-58084 Hagen
Germany
011-49-2331-987-2640 (Phone)
011-49-2331-987-391 (Fax)

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