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Currency Misalignments and Optimal Monetary Policy: A Reexamination

The American economic review, 2011-10, Vol.101 (6), p.2796-2822 [Peer Reviewed Journal]

Copyright© 2011 American Economic Association ;Copyright American Economic Association Oct 2011 ;ISSN: 0002-8282 ;EISSN: 1944-7981 ;DOI: 10.1257/aer.101.6.2796 ;CODEN: AENRAA

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Title:
Currency Misalignments and Optimal Monetary Policy: A Reexamination
Author: Engel, Charles
Subjects: American dollar ; Central banks ; Consumer Price Index ; Consumer prices ; Currencies ; Currency ; Currency misalignments ; Distribution costs ; Economic models ; Economic theory ; Foreign exchange markets ; Foreign exchange rates ; Homes ; Households ; Inflation rates ; Monetary policy ; Monetary theory ; Open economies ; Optimal policy ; Output gaps ; Relative prices ; Shorter Papers ; Sticky prices ; Studies ; Violations ; Welfare
Is Part Of: The American economic review, 2011-10, Vol.101 (6), p.2796-2822
Description: This paper examines optimal monetary policy in an open-economy two-country world with sticky prices under pricing to market. We show that currency misalignments are inefficient and lower world welfare. We find that optimal policy must target consumer price inflation, the output gap, and the currency misalignment. The paper derives the loss function of a cooperative monetary policymaker and the optimal targeting rules. The model is a modified version of Clarida, Galí, and Gertler (JME, 2002). The key change is that we allow pricing to market or local-currency pricing and consider the policy implications of currency misalignments. JEL: E52, F31, F41
Publisher: Nashville: American Economic Association
Language: English
Identifier: ISSN: 0002-8282
EISSN: 1944-7981
DOI: 10.1257/aer.101.6.2796
CODEN: AENRAA
Source: ProQuest Central

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Currency Misalignments and Optimal Monetary Policy: A Reexamination

Copyright© 2011 American Economic Association ;Copyright American Economic Association Oct 2011 ;ISSN: 0002-8282 ;EISSN: 1944-7981 ;DOI: 10.1257/aer.101.6.2796 ;CODEN: AENRAA

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