Working Paper: NBER ID: w2467
Authors: Stephen J. Turnovsky; Tamer Basar; Vasco Dorey
Abstract: This paper develops strategic monetary policies using a standard two-country macro model under flexible exchange rates. The equilibria considered include feedback Nash and feedback Stackelberg, both of which are compared to the Pareto optimal cooperative equilibrium. The optimal policies are obtained as feedback rules in which real money supplies are adjusted to movements in the real exchange rate. The properties of these policies and their welfare implications are analyzed using numerical simulations. The contrast in the present results with those obtained previously for a short-run horizon suggest the importance of both intertemporal and intratemporal tradeoffs in the determination of optimal strategic policies.
Keywords: monetary policy; strategic behavior; international coordination; dynamic models
JEL Codes: E52; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Optimal monetary policies derived through feedback rules (E61) | Improved welfare outcomes (I39) |
| Feedback Nash equilibrium (C72) | Increased fluctuations in inflation and output (E39) |
| Increased fluctuations in inflation and output (E39) | Higher welfare costs over time (J32) |
| Feedback Stackelberg solution (D43) | More stable adjustment path (C62) |
| More stable adjustment path (C62) | Reduced welfare costs for the leader (D69) |
| Cooperative equilibrium (C71) | Fastest convergence and minimized joint welfare costs (D69) |
| Dynamic policies (E60) | Superior outcomes over time (C41) |