Working Paper: CEPR ID: DP4385
Authors: Marco Celentani; Jos Ignacio Conderuiz; Klaus Desmet
Abstract: 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.
Keywords: currency union; inflation; monetary cooperation; risk sharing; security markets; terms of trade
JEL Codes: E50; F30; F42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Central banks committing to a contingent monetary policy rule (E52) | Domestic welfare (I38) |
| Central banks' strategic choices (E58) | Domestic welfare (I38) |
| Countries facing asymmetric shocks (F41) | Improved outcomes (I14) |