Working Paper: CEPR ID: DP4257
Authors: Giovanni Lombardo; Alan Sutherland
Abstract: 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.
Keywords: interest rate rules; monetary policy; money supply rules
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 |
|---|---|
| noncoordinated monetary policy (E61) | different equilibrium outcomes (D50) |
| choice of policy instrument (E64) | Nash equilibrium (C72) |
| interest elasticity of money demand (E41) | choice of policy instrument (E64) |
| choice of policy instrument (E64) | welfare outcomes (I38) |
| feedback rules (D91) | welfare outcomes (I38) |
| interest elasticity of money demand (E41) | choice of nominal interest rate rules over money supply rules (E49) |
| elasticity of money demand (zero or one) (E41) | Nash equilibrium unaffected (C72) |