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CEP discussion paper
Designing Target Rules for International Monetary Policy Cooperation
Pierpaolo Benigno and Gianluca Benigno
December 2004
Paper No' CEPDP0666:
Full Paper (pdf)

JEL Classification: E52; F41; F42

Tags: monetary policy cooperation; sticky prices; welfare analysis; targeting rules; inflation target

This study analyzes a two-country dynamic general equilibrium model with nominal rigidities, monopolistic competition and producer currency pricing. A quadratic approximation to the utility of the consumers is derived and assumed as the policy objective function of the policymakers. It is shown that only under special conditions there are no gains from cooperation and moreover that the paths of the exchange rate and prices in the constrained-efficient solution depend on the kind of disturbance that affects the economy. It might be the case either for fixed or floating exchange rates. Despite this result, simple targeting rules that involve only targets for the growth of output and for both domestic GDP and CPI inflation rates can replicate the cooperative allocation.