Working Paper: CEPR ID: DP4251
Authors: Alan Sutherland
Abstract: 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.
Keywords: Financial integration; Monetary policy coordination; Risk sharing
JEL Codes: E52; E58; F42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| financial market integration (F30) | welfare gains from monetary policy coordination (F42) |
| elasticity of substitution between home and foreign goods differs from unity (F12) | welfare gains from monetary policy coordination (F42) |
| presence of international financial markets (F30) | full consumption risk sharing (D11) |
| full consumption risk sharing (D11) | potential welfare gains from coordinated policy (F42) |
| asset trade occurs before policy decisions (H82) | larger gains from coordination (D70) |
| asset trade occurs after policy decisions (H82) | smaller welfare gains (D69) |
| existence of financial markets (G19) | additional spillover effects (F69) |
| additional spillover effects (F69) | increased potential gains from policy coordination (F42) |