Citation

Discussion Paper Details

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Title: Inflation in Open Economies with Complete Markets

Author(s): Marco Celentani, José Ignacio Conde-Ruiz and Klaus Desmet

Publication Date: May 2004

Keyword(s): currency union, inflation, monetary cooperation, risk sharing, security markets and terms of trade

Programme Area(s): International Macroeconomics

Abstract: This Paper uses an overlapping generations model to analyse monetary policy in a two-country model with asymmetric shocks. Agents insure against risk through the exchange of a complete set of real securities. Each central bank is able to commit to the contingent monetary policy rule that maximizes domestic welfare. In an attempt to improve their country's terms of trade of securities, central banks may choose to commit to costly inflation in favourable states of nature. In equilibrium the effects on the terms of trade wash out, leaving both countries worse off. Countries facing asymmetric shocks may therefore gain from monetary cooperation.

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Bibliographic Reference

Celentani, M, Conde-Ruiz, J and Desmet, K. 2004. 'Inflation in Open Economies with Complete Markets'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=4385