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International policy coordination and simple monetary policy rules

Summary

This paper studies monetary policy in an optimizing two-country model. We suppose a two-step production process that is associated with vertical trade. Prices of final consumption goods are sticky and pass-through can be incomplete. Monetary authorities should respond to both home and foreign shocks in this set-up. Which simple, i.e. non-optimal, targeting rule best supports the welfare maximizing policy hinges critically on the degree of the cross-country interdependence in production and the relative importance of productivity and cost-push shocks. We argue that the relative volatility of productivity and cost-push shocks determines whether the monetary authority should follow a price targeting rule whereas the degree of vertical integration determines which simple price targeting rule (producer or consumer price index targeting) is best.

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Correspondence to Wolfram Berger.

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Berger, W. International policy coordination and simple monetary policy rules. Swiss J Economics Statistics 146, 451–479 (2010). https://doi.org/10.1007/BF03399323

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JEL-Classification

  • F41
  • F42
  • E52
  • E58

Keywords

  • policy coordination
  • policy rule
  • consumer price targeting
  • producer price targeting
  • monetary targeting