Discussion Paper Details

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Title: When Does Coordination Pay?

Author(s): Marcus Miller and Mark Salmon

Publication Date: July 1990

Keyword(s): Certainty Equivalence, Floating Exchange Rates, Policy Coordination and Time Consistency

Programme Area(s): International Macroeconomics

Abstract: In a continuous time model of two symmetric open economies, with a floating exchange rate, we find that the pay-off to the policy coordination depends systematically on the heterogeneity of their inflation experience. While monetary policy coordination improves welfare when there is a common rate of underlying inflation, it exacerbates the `time-consistency' problem arising when there are differences. Since the principle of `certainty equivalence' applies to time-consistent policy in linear quadratic models, we are also able to give a stochastic interpretation of the deterministic results.

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Bibliographic Reference

Miller, M and Salmon, M. 1990. 'When Does Coordination Pay?'. London, Centre for Economic Policy Research.