DP4385 Inflation in Open Economies with Complete Markets
|Author(s):||Marco Celentani, José Ignacio Conde-Ruiz, Klaus Desmet|
|Publication Date:||May 2004|
|Keyword(s):||currency union, inflation, monetary cooperation, risk sharing, security markets, terms of trade|
|JEL(s):||E50, F30, F42|
|Programme Areas:||International Macroeconomics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=4385|
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.