Optimal Monetary Policy and Sectoral Shocks: Is International Monetary Cooperation Beneficial?

Authors

  • Wolfram Berger

    1. University of Hagen, D-58084 Hagen, Germany wolfram.berger@fernuni-hagen.de
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       This paper was presented at the Royal Economic Society Annual Conference 2004 in Swansea, the EEA/ESEM Annual Conference 2004 in Madrid, the 9th International Conference on Macroeconomic Analysis and International Finance at the University of Crete, and the University of Kassel. I am grateful for valuable comments from conference and seminar participants.


Abstract

A stochastic general-equilibrium model is used to explore the welfare effects of optimal monetary policy and the potential benefits of policy coordination. Cross-country perfectly symmetric shocks in the traded goods sectors and imperfectly correlated shocks in the non-traded goods sectors are considered. In this set-up, monetary policy may not be able to achieve efficient sectoral resource allocations within countries and avoid inefficient relative price changes across countries. Welfare gains from coordination are sizable if the shocks to the traded and non-traded goods sectors are negatively correlated and both sectors are of roughly equal size.

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