Working Paper: NBER ID: w1824
Authors: Stephen J. Turnovsky; Vasco Dorey
Abstract: This paper analyzes strategic monetary policies using a standard two country stochastic macro model. Three noncooperative equilibria, namely Cournot, Stackelberg, and Consistent Conjectural Variations, are considered.The Pareto Optimal equilibrium, where aggregate joint costs are minimizedis also considered, and all strategic equilibria are compared to the perfectly fixed and flexible exchange rate regimes. The main conclusions obtained are:(i) Demand shocks are much less problematical than supply disturbances from the viewpoint of macro stabilization; (ii) the gains from cooperation are typically small; (iii) the strategic equilibria all show substantial margins of superiority over the fixed and flexible regimes.
Keywords: Monetary Policy; Interdependent Economies; Stochastic Disturbances; Strategic Behavior
JEL Codes: E52; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| demand shocks (E39) | effectiveness of monetary policy (E52) |
| strategic equilibria (C73) | economic outcomes (F61) |
| cooperative strategies (C71) | performance of monetary policy (E52) |
| one country's monetary policy (E52) | spillover effects on other economy (F69) |
| reaction functions of policymakers (D78) | adjustments in output and prices (E39) |
| exchange rate adjustments (F31) | relative price adjustments (P22) |