Exchange Rate Policy Coordination under Inflation Targeting between Japan and Korea
Both Japan and Korea are very sensitive to changes in their exchange rate against the U.S dollar as they are trade rivals in the world market. Due to domestic political pressure, the central bank of each country is tempted to devalue its currency. In this paper we demonstrate, based on game theory, that the two rival countries can become better off if they conduct exchange rate policy coordination. To seek mutual benefit, we propose mutually agreeable rules of exchange rate intervention for Japan and Korea. Also we suggest that a range target is better than a point target. This claim is based on theoretical and practical considerations.
Key wordspolicy coordination inflation targeting exchange-rate targeting monetary targeting point targets and a range target
JEL Classification CodesF31 F36 and F42
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