Working Paper: NBER ID: w2604
Authors: Stephen J. Turnovsky; Vasco Dorey
Abstract: This paper analyzes the choice of monetary instrument in a stochastic two country setting where each country's set of monetary policy instruments includes both the money supply and the interest rate. It shows how the optimal choice of instrument is determined In two stages. First, for each pair, the minimum welfare coat for each economy is determined This defines a par of payoff matrices and the second stage involves determining the Nash equilibrium for this bimatrix game. In our illustrative example for the alternative shocks considered, a dominant Nash equilibrium is always obtained.
Keywords: monetary policy; Nash equilibrium; interdependent economies
JEL Codes: E52; E61
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Monetary policy instrument choice (E52) | welfare costs (I30) |
| Money supply usage (E51) | nominal depreciations (G32) |
| nominal depreciations (G32) | domestic output (E23) |
| Interest rate usage (E43) | cross-country effects (F69) |
| cross-country effects (F69) | output (C67) |
| Monetary shocks (E39) | output fluctuations (E39) |
| Choice of instruments (C36) | welfare costs (I30) |