International Capital Mobility and the Coordination of Monetary Rules

Nicholas Carlozzi · John B. Taylor

41 citations0/0 files storedThe MIT Press eBooks

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Monetary Policy and Economic Impact Global Financial Crisis and Policies Economic theories and models

Abstract

The paper develops a two-country model with flexible exchange rates and perfect capital mobility, for evaluating the alternative macroeconomic policy rules.Macroeconomic performance is measured in terms of fluctuations in inflation and output.Expectations are rational, and prices are sticky; wage setting is staggered over time.The countries are linked by aggregate spending effects, relative price effects, and mark-up pricing arrangements.The model is solved and analyzed through deterministic and stochastic simulation techniques.The results suggest that international capital mobility is not necessarily an impediment to efficient domestic macroeconomic performance.Changes in the expected appreciation or a depreciation of the exchange rate along with differentials between real interest rates in the two countries can permit macroeconomic performance in one country to be relatively independent of the policy rule chosen by the other country.The results depend on the particular parameter values used in the model and suggest the need for further econometric work to determine the size of these parameters.

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References

1976Expectations and Exchange Rate Dynamics 1963Capital Mobility and Stabilization Policy Under Fixed and Flexible Exchange Rates 1980Aggregate Dynamics and Staggered Contracts 1962Domestic Financial Policies Under Fixed and Under Floating Exchange Rates 1973The Demand for Money Revisited 1983Solution and Maximum Likelihood Estimation of Dynamic Nonlinear Rational Expectations Models 1982A Model of Exchange Rate Dynamics 1981Open Economy Macroeconomics

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1986Chapter 34 New econometric approaches to stabilization policy in stochastic models of macroeconomic fluctuations 1988Obstacles to International Macroeconomic Policy Coordination 1988When international policy coordination matters: an empirical analysis 1989Differences in economic fluctuations in Japan and the United States: The role of nominal rigidities 1986Monetary Policies in Interdependent Economies with Stochastic Disturbances: A Strategic Approach 2000

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