Designing Target Rules for International Monetary Policy Cooperation

Abstract

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