Discussion paper

DP4251 International Monetary Policy Coordination and Financial Market Integration

This Paper analyses the implications of financial market structure for the existence and size of welfare gains from international monetary policy coordination. Policy coordination is analysed in a two-country stochastic general equilibrium model simple enough to yield explicit analytical solutions. Welfare gains from coordination are found to be largest when: the elasticity of substitution between home and foreign goods differs from unity; international markets in state-contingent assets allow full consumption risk sharing; and asset trade takes place before monetary policy rules are determined. Welfare gains are found to be much smaller when there are no international financial markets.

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Citation

Sutherland, A (2004), ‘DP4251 International Monetary Policy Coordination and Financial Market Integration‘, CEPR Discussion Paper No. 4251. CEPR Press, Paris & London. https://cepr.org/publications/dp4251