A Simple Approach to International Monetary Policy Coordination

Abstract

This paper analyzes the strategic interaction between the monetary policies of two countries, in an intertemporal general equilibrium model with nominal rigidities and imperfect competition. It offers an excursus on non-cooperative towards cooperative solutions. All the results can be read by comparing the strength of the two biases: the monopolistic distortions and the terms of trade externalities. In the best feasible allocation, the larger country retains some monopolistic distortions while the smaller country reaches the competitive level.