How Valuable Is Exchange Rate Flexibilty? Optimal Monetary Policy under Sectoral Shocks

2002 ◽  
Author(s):  
Cédric Tille
Keyword(s):  
Monetary Policy ◽  
Exchange Rate ◽  
Optimal Monetary Policy ◽  
Sectoral Shocks

scholarly journals Optimal monetary policy in a model of vertical production and trade with reference currency

2018 ◽  
Vol 20 (1) ◽  
Author(s):  
Liutang Gong ◽  
Chan Wang ◽  
Heng-Fu Zou
Keyword(s):  
Monetary Policy ◽  
Exchange Rate ◽  
Nominal Exchange Rate ◽  
Intermediate Goods ◽  
Optimal Monetary Policy ◽  
Monetary Cooperation ◽  
Monetary Authorities ◽  
Solution Methods ◽  
First Time ◽  
Vertical Production And Trade

Abstract This paper examines optimal monetary policy rules in a model of vertical production and trade with reference currency. As evidenced by empirical findings, we assume that final-goods prices are sticky, but intermediate-goods prices are flexible. We find that even if intermediate-goods prices are flexible, monetary authorities need to respond to the shocks at the stage of intermediate-goods production. We also find that, when a shock occurs at the stage of final-goods production, monetary responses are independent of the expenditure share of final-goods producers on intermediate goods. For the first time in the literature, our model gives a condition under which both countries are willing to participate in monetary cooperation. Thus the gains from cooperation are real. In addition, we compare the volatility of the nominal exchange rate in Nash case with that in cooperative case, and compare the volatility of the nominal exchange rate in our model with that in a model without vertical production and trade as well. We also extend the model to consider a case of dual price stickiness. We find that the change in solution methods completely alters the conclusions of the model.

scholarly journals Why monetary board: Monetary board and endogenic price flexibility

2004 ◽  
Vol 49 (162) ◽  
pp. 175-188
Author(s):  
Tamara Basic
Keyword(s):  
Monetary Policy ◽  
Exchange Rate ◽  
Optimal Policy ◽  
Flexible Exchange Rate ◽  
Exchange Rate Policy ◽  
Optimal Monetary Policy ◽  
Rate Policy ◽  
Price Flexibility ◽  
The Difference ◽  
Initial Price

The paper presents a model which proves that a unilateral exchange rate fixing, i.e. monetary board, as opposed to certain opinions, is an optimal policy since it increases flexibility of nominal prices, which is the ultimate goal of a flexible exchange rate policy. A suitable calibration of the model shows that the higher the initial price flexibility, the lower the difference needed for "utility increase" in getting the producers to switch from fixed to flexible prices. The results obtained in all cases indicate that exchange rate fixing increases price flexibility, which proves that a unilateral exchange rate fixing, i.e. monetary board, could be an optimal monetary policy.

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