International monetary co-operation in a world of imperfect information

Working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 06 March 2008

Working Paper No. 344
By Kang Yong Tan and Misa Tanaka

This paper examines the welfare implications of international monetary co-operation using a stylised two-country New Keynesian general equilibrium model of imperfect information. We show that setting a self-oriented monetary policy rule generally leads to welfare gains relative to passive monetary policy even when central banks do not have perfect information about the foreign economy. However, information sharing between central banks in this set-up, by itself, has ambiguous welfare implications.Gains from monetary co-ordination are largest when productivity shocks are negatively correlated across countries.

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