International Dimensions of Optimal Monetary Policy

This paper provides a baseline general-equilibrium model of optimal monetary policy among interdependent economies, with monopolistic firms that set prices one period in advance. Strict adherence to inward-looking policy objectives such as the stabilization of domestic output cannot be optimal when firms' markups are exposed to currency fluctuations. Such policies induce excessive volatility in exchange rates and foreign sales revenue, leading exporters to set higher prices in response to higher profit risk. In general, optimal rules trade off a larger domestic output gap against lower import prices. Monetary rules in a world Nash equilibrium lead to smaller exchange rate volatility relative to both inward-looking rules and discretionary policies, even when the latter do not suffer from any inflationary (or deflationary) bias. Gains from international monetary cooperation are related in a non-monotonic way to the degree of exchange rate pass-through.

The simple geometry of transmission and stabilization in closed and open economies

This paper provides an introduction to the recent literature on macroeconomic stabilization in closed and open economies. We present a stylized theoretical framework, and illustrate its main properties with the help of an intuitive graphical apparatus. Among the issues we discuss: optimal monetary policy and the welfare gains from macroeconomic stabilization; international transmission of real and monetary shocks and the role of exchange rate pass-through; the design of optimal exchange rate regimes and monetary coordination among interdependent economies.Classification-JEL: E31, E52, F42optimal monetary policy, nominal rigidities, exchange rate pass-through, international cooperation

Stability, Asymmetry, and Discontinuity: The Launch of European Monetary Union

macroeconomics, EMU, European Monetary Union

The Simple Geometry of Transmission and Stabilization in Closed and Open Economies

This paper provides an introduction to the recent literature on macroeconomic stabilization in closed and open economies. We present a stylized theoretical framework, and illustrate its main properties with the help of an intuitive graphical apparatus. Among the issues we discuss: optimal monetary policy and the welfare gains from macroeconomic stabilization; international transmission of real and monetary shocks and the role of exchange rate pass-through; the design of optimal exchange rate regimes and monetary coordination among interdependent economies.

Interpreting the ERM Crisis: Country-Specific and Systemic Issues

Most interpretations of the Exchange Rate Mechanism crisis in 1992-93 ignore the key role played by structural policy spillovers among European countries, and overlook the effects of coordination (or lack thereof) of monetary and exchange rate policies among the countries making up the periphery of the system. This paper provides a simple analytical framework, able to encompass the recent literature on currency crises, while developing it by bringing out the decisive role of the strategic interactions among national policy makers in a multi-country monetary and exchange rate game. In contrast to an approach that focuses exclusively on country-specific issues, a systemic view is ultimately able to unravel more coherently, and more convincingly, the "puzzles" of the ERM crisis.

What Caused the Asian Currency and Financial Crisis?

The paper explores the view that the Asian currency and financial crises in 1997 and 1998 reflected structural and policy distortions in the countries of the region, even though market overreaction and herding caused the plunge of exchange rates, asset prices and economic activity to be more severe than was warranted by the initial weak economic conditions. The first part of the paper provides an overview of economic fundamentals in Asia on the eve of the crisis, with emphasis on current account imbalances, quantity and quality of financial ‘overlending’, banking problems, and the composition, maturity and size of capital inflows. The second part of the paper presents a reconstruction of the Asian meltdown — from the antecedents in 1995-96 to the recent developments in the summer of 1998 — in parallel with a survey of the debate on the strategies to recover from the crisis, the role of international intervention, and the costs and benefits of capital controls.financial crisis, asia, currency

Varieties and the Transfer Problem: The Extensive Margin of Current Account Adjustment

Most analyses of the macroeconomic adjustment required to correct global imbalances ignore net exports of new varieties of goods and services and do not account for firms'net entry in the product market. In this paper we revisit the macroeconomics of trade adjustment in the context of the classic 'transfer problem', using a model where the set of exportables, importables and nontraded goods is endogenous. We show that exchange rate movements associated with adjustment are dramatically lower when the above features are accounted for, relative to traditional macromodels. We also find that, for reasonable parameterizations, consumption and employment (hence welfare) are not highly sensitive to product differentiation, and change little regardless of whether adjustment occurs through movements in relative prices or quantities. This result warns against interpreting the size of real depreciation associated with trade rebalancing as an index of macroeconomic distress.transfer problem, current account, global imbalances, extensive margin