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The Choice of Monetary Instrument in Two Interdependent Economies Under Uncertainty

Stephen J. Turnovsky, Vasco d'Orey

NBER Working Paper No. 2604 (Also Reprint No. r1234)
Issued in June 1988
NBER Program(s):International Trade and Investment Program, International Finance and Macroeconomics Program

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.

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Document Object Identifier (DOI): 10.3386/w2604

Published: Journal of Monetary Economics, Vol. 23, No. 1, pp. 121-133, (1989). citation courtesy of

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