TY  - JOUR
AU  - Corsetti,Giancarlo
AU  - Pesenti,Paolo
TI  - International Dimensions of Optimal Monetary Policy
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 8230
PY  - 2001
Y2  - April 2001
UR  - http://www.nber.org/papers/w8230
L1  - http://www.nber.org/papers/w8230.pdf
N1  - Author contact info:
Giancarlo Corsetti
Faculty of Economics
Cambridge University
Sidgwick Avenue
CB3 9DD Cambridge, Cambs
United Kingdom
Tel: +44(0)1223335235
E-Mail: giancarlo.corsetti@gmail.com

Paolo A. Pesenti
Federal Reserve Bank of New York
33 Liberty Street
New York, NY 10045
Tel: 212/720-5493
Fax: 212/720-6831
E-Mail: paolo.pesenti@ny.frb.org
AB  - This paper provides a baseline general-equilibrium model of optimal monetary policy among interdependent economies, with monopolistic firms that set prices one period in advance. Strict adherence to inward-looking policy objectives such as the stabilization of domestic output cannot be optimal when firms' markups are exposed to currency fluctuations. Such policies induce excessive volatility in exchange rates and foreign sales revenue, leading exporters to set higher prices in response to higher profit risk. In general, optimal rules trade off a larger domestic output gap against lower import prices. Monetary rules in a world Nash equilibrium lead to smaller exchange rate volatility relative to both inward-looking rules and discretionary policies, even when the latter do not suffer from any inflationary (or deflationary) bias. Gains from international monetary cooperation are related in a non-monotonic way to the degree of exchange rate pass-through.
ER  -