DP4257 Policy Instrument Choice and non-coordinated Monetary Policy in Interdependent Economies

Author(s): Giovanni Lombardo, Alan Sutherland
Publication Date: February 2004
Keyword(s): interest rate rules, monetary policy, money supply rules
JEL(s): E52, E58, F42
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=4257

Non-coordinated monetary policy is analysed in a stochastic two-country general equilibrium model. Non-coordinated equilibria are compared in two cases: one where policy is set in terms of state-contingent money supply rules, and one where policy is set in terms of state-contingent nominal interest rate rules. In general the non-coordinated equilibrium differs between the two types of policy rule, but a number of special cases are identified where the equilibria are identical. The endogenous choice of policy instrument is analysed and the Nash equilibrium in the choice of policy instrument is shown to depend on the interest elasticity of money demand.