Global Price Shocks and International Monetary Coordination

Individual central banks respond to global supply shocks that transmit inflationary pressures—such as oil prices, shipping costs, and bottlenecks in global supply chains—taking these conditions as given. However, their combined global response determines global demand and, thus, the resulting global price pressure. This paper builds a simple monetary open economy model to explore the economic implications of this channel. We show that, following a negative world supply shock, uncoordinated monetary policy may be excessively loose. Our mechanism for this “expansionary bias” applies to an aggregate shock in a symmetric world economy of small open economies having no individual control over their terms of trade. In these ways, it is distinct from asymmetric shocks and terms-of-trade manipulation motives emphasized in the monetary coordination literature.