Swiss Journal of Economics and Statistics

, Volume 146, Issue 2, pp 451–479 | Cite as

International policy coordination and simple monetary policy rules

Open Access


This paper studies monetary policy in an optimizing two-country model. We suppose a two-step production process that is associated with vertical trade. Prices of final consumption goods are sticky and pass-through can be incomplete. Monetary authorities should respond to both home and foreign shocks in this set-up. Which simple, i.e. non-optimal, targeting rule best supports the welfare maximizing policy hinges critically on the degree of the cross-country interdependence in production and the relative importance of productivity and cost-push shocks. We argue that the relative volatility of productivity and cost-push shocks determines whether the monetary authority should follow a price targeting rule whereas the degree of vertical integration determines which simple price targeting rule (producer or consumer price index targeting) is best.


F41 F42 E52 E58 


policy coordination policy rule consumer price targeting producer price targeting monetary targeting 


  1. Batini, Nicoletta, Richard Harrison and Stephen Millard (2003), “Monetary Policy Rules for an Open Economy”, Journal of Economic Dynamics and Control, 27, pp. 2059–2094.CrossRefGoogle Scholar
  2. Bullard, James and Aarti Singh (2008), “Worldwide Macroeconomic Stability and Monetary Policy Rules”, Journal of Monetary Economics, 55, pp. S34–S47.CrossRefGoogle Scholar
  3. Calvo, Guillermo (1983), “Staggered Prices in a Utility-Maximizing Framework”, Journal of Monetary Economics, 12, pp. 383–398.CrossRefGoogle Scholar
  4. Campa, Jose and Linda Goldberg (2005), “Exchange Rate Pass-Through Into Import Prices”, Review of Economics and Statistics, 87, pp. 679–690.CrossRefGoogle Scholar
  5. Campa, Jose, Linda Goldberg and Jose Gonzalez-Minguez (2005), “Exchange Rate Pass-Through to Import Prices in the Euro Area”, Staff Report No. 219, Federal Reserve Bank of New York, New York.Google Scholar
  6. Choudhri, Ehsan and Dalia Hakura (2001), “Exchange Rate Pass-Through to Domestic Prices: Does the Inflationary Environment Matter?”, International Monetary Fund Working Paper 01/194, International Monetary Fund, Washington, DC.Google Scholar
  7. Clarida, Richard, Jordi Gali and Mark Gertler (2002), “A Simple Framework for International Monetary Policy Analysis”, Journal of Monetary Economics, 49, pp. 879–904.CrossRefGoogle Scholar
  8. Cole, Harold and Maurice Obstfeld (1991), “Commodity Trade and International Risk Sharing: How Much Do Financial Markets Matter?”, Journal of Monetary Economics, 28, pp. 3–24.CrossRefGoogle Scholar
  9. Corsetti, Giancarlo and Paolo Pesenti (2005), “International Dimensions of Optimal Monetary Policy”, Journal of Monetary Economics, 52, pp. 281–305.CrossRefGoogle Scholar
  10. Devereux, Michael and Charles Engel (2007), “Expenditure Switching vs. Real Exchange Rate Stabilization: Competing Objectives for Exchange Rate Policy”, Journal of Monetary Economics, 54, pp. 2346–2374.CrossRefGoogle Scholar
  11. Devereux, Michael, Pilip Lane and Juanyi Xu (2006), “Exchange Rates and Monetary Policy in Emerging Market Economies”, Economic Journal, 116, pp. 478–506.CrossRefGoogle Scholar
  12. Engel, Charles and John Rogers (2001), “Deviations from Purchasing Power Parity: Causes and Welfare Costs”, Journal of International Economics, 55, pp. 29–57.CrossRefGoogle Scholar
  13. Erceg, Christopher, Dale Henderson and Andrew Levin (2000), “Optimal Monetary Policy with Staggered Wage and Price Contracts”, Journal of Monetary Economics, 46, pp. 281–313.CrossRefGoogle Scholar
  14. Feve, Patrick, Julien Matheron and Celine Poilly (2007), “Monetary Policy Dynamics in the Euro Area”, Economics Letters, 96, pp. 97–102.CrossRefGoogle Scholar
  15. Gali, Jordi and Tommaso Monacelli (2005), “Monetary Policy and Exchange Rate Volatility in a Small Open Economy”, Review of Economic Studies, 72, pp. 707–734.CrossRefGoogle Scholar
  16. Hoermann, Markus and Andreas Schabert (2009), “An Interest Rate Peg Might Be Better Than You Think”, fc. in Economics Letters.Google Scholar
  17. Huang, Kevin and Zeng Liu (2004), “Production Interdependence and Welfare”, ECB Working Paper No. 355, European Central Bank, Frankfurt.Google Scholar
  18. Hummels, David, Jun Ishii and Kei-Mu Yi (2001), “The Nature and Growth of Vertical Specialization in World Trade”, Journal of International Economics, 54, pp. 75–96.CrossRefGoogle Scholar
  19. Kollmann, Robert (2002), “Monetary Policy Rules in the Open Economy: Effects on Welfare and Business Cycles”, Journal of Monetary Economics, 49, pp. 989–1015.CrossRefGoogle Scholar
  20. Leith, Campbell and Simon Wren-Lewis (2009), “Taylor Rules in the Open Economy”, fc. in European Economic Review.Google Scholar
  21. McCallum, Benett and Edward Nelson (1999), “Nominal Income Targeting in an Open-Economy Optimizing Model”, Journal of Monetary Economics, 43, pp. 553–578.CrossRefGoogle Scholar
  22. McCallum, Benett and Edward Nelson (2005), “Targeting versus Instrument Rules for Monetary Policy”, Federal Reserve Bank of St. Louis Review, 87, pp. 597–611.Google Scholar
  23. Obstfeld, Maurice (2001), “International Macroeconomics: Beyond the Mundell-Fleming Model”, International Monetary Fund Staff Papers, 47, pp. 1–39.Google Scholar
  24. Obstfeld, Maurice and Kenneth Rogoff (1995), “Exchange Rate Dynamics Redux”, Journal of Political Economy, 103, pp. 624–660.CrossRefGoogle Scholar
  25. Obstfeld, Maurice and Kenneth Rogoff (2002), “Global Implications of Self-Oriented National Monetary Rules”, Quarterly Journal of Economics, 117, pp. 503–536.CrossRefGoogle Scholar
  26. Parsley, David and Shang-Jin Wei (2001), “Explaining the Border Effect: The Role of Exchange Rate Variability, Shipping Costs, and Geography”, Journal of International Economics, 55, pp. 87–105.CrossRefGoogle Scholar
  27. Shi, Kang and Juanyi Xu, (2007), “Optimal Monetary Policy with Vertical Production and Trade”, Review of International Economics, 15, pp. 514–537.CrossRefGoogle Scholar
  28. Smets, Frank and Raf Wouters (2002), “Openness, Imperfect Exchange Rate Pass-Through and Monetary Policy”, Journal of Monetary Economics, 49, pp. 947–981.CrossRefGoogle Scholar
  29. Sutherland, Alan (2004), “International Monetary Policy Coordination and Financial Market Integration”, CEPR Discussion Paper No. 4251, London.Google Scholar
  30. Sutherland, Alan (2005), “Cost-Push Shocks and Monetary Policy in Open Economies”, Oxford Economic Papers, 57, pp. 1–33.CrossRefGoogle Scholar
  31. Sutherland, Alan (2006), “The Expenditure Switching Effect, Welfare and Monetary Policy in a Small Open Economy”, Journal of Economic Dynamics and Control, 30, pp. 1159–1182.CrossRefGoogle Scholar
  32. Svensson, Lars (2002), “Inflation Targeting: Should It Be Modeled as an Instrument Rule or a Targeting Rule?”, European Economic Review, 46, pp. 771–780.CrossRefGoogle Scholar
  33. Svensson, Lars (2005), “Targeting Rules vs. Instrument Rules for Monetary Policy: What Is Wrong with McCallum and Nelson?”, Federal Reserve Bank of St. Louis Review, 87, pp. 613–626.Google Scholar
  34. Taylor, John (1993), “Discretion Versus Policy Rules in Practice”, Carnegie-Rochester Conference Series on Public Policy, 39, pp. 195–214.CrossRefGoogle Scholar
  35. Yi, Kei-Mu (2003), “Can Vertical Specialization Explain the Growth of World Trade?”, Journal of Political Economy, 111, pp. 52–102.CrossRefGoogle Scholar

Copyright information

© Swiss Society of Economics and Statistics 2010

Authors and Affiliations

  1. 1.IESEG School of Management and LEM (Lille — Economics and Management — UMR CNRS, 8179)LilleFrance
  2. 2.Technical University of CottbusCottbusGermany

Personalised recommendations