The Role of Financial Market Structure and the Trade Elasticity for Monetary Policy in Open Economies

Rabitsch, Katrin

doi:10.1111/j.1538-4616.2012.00503.x

Cited by 24 publications

(16 citation statements)

References 55 publications

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“…This effect is less acute, but still present, when there is trade in a single bond. See Bodenstein (2010) and Rabitsch (2012) for further discussion of how a number of key welfare and equilibrium results can be reversed at particularly low values of the trade elasticity in models similar to the one analysed here. 13 Note that the standard deviations of the real exchange rate gap and the output gap (and other variables) are all quite sensitive to the degree of persistence of TFP and taste shocks.…”

Section: Optimal Monetary Policy In the Basic Modelmentioning

confidence: 94%

Optimal monetary policy, exchange rate misalignments and incomplete financial markets

Senay

Sutherland

2019

Journal of International Economics

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Recent literature shows that, when international financial trade is restricted to autarky or a single bond, there are internal and external welfare trade-offs that imply optimal monetary policy, in principle, deviates from inflation targeting in order to offset real exchange rate misalignments. This paper develops a more realistic model of incomplete markets, where there is international trade in multiple assets. The analysis shows that the presence of multiple assets creates a potentially powerful interaction between monetary policy and household portfolio allocation. This interaction is, by definition, not present when there is financial autarky or a single tradeable bond and this paper shows that the interaction with portfolio allocation can imply that optimal monetary policy generates a quantitatively much more significant stabilisation of the real exchange rate gap than implied by simpler models of financial market incompleteness.

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Section: Optimal Monetary Policy In the Basic Modelmentioning

confidence: 94%

Optimal monetary policy, exchange rate misalignments and incomplete financial markets

Senay

Sutherland

2019

Journal of International Economics

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“…Conversely using Bayesian techniques, Rabanal and Tuesta (2010) estimate this elasticity to lie below 1, consistently with the results of Corsetti, Dedola and Leduc (2008a). Then, in line with De Paoli (2009b) and Rabitsch (2012) we allow the trade elasticity to vary from 0 to 3.9 34 and within this range we study the welfare gains across the different regimes.…”

Section: Parameterizationmentioning

confidence: 99%

On the benefits of a monetary union: Does it pay to be bigger?

Forlati

2015

Journal of International Economics

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A two area dynamic stochastic general equilibrium model is employed to investigate the welfare implications of losing monetary independence. Two policy regimes are compared: (i) in one area there is a common currency, while in the other area countries still retain their autonomous monetary policy; (ii) there are two monetary unions. When chosen by national authorities, monetary policy can stabilize optimally the effects of country-specific shocks. However, in that case, policy decisions internalize neither the spillover effects on consumers living in the same area nor their impact on the world economy. Thus the adoption of a common currency implies a trade-off between the cost of not tailoring monetary policy to single country economic conditions and the gains entailed by the improvement upon the conduct of national monetary policies. Our results show that under markup shocks and plausible calibrations, there may be welfare gains from adopting a common currency.

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“…Among the papers in this literature, our work is particularly linked to the ones evaluating the gains from monetary policy cooperation (see, for example, Benigno and Benigno (2006) and Rabitsch (2012)). …”

Section: Other Related Literaturementioning

confidence: 99%

Capital Controls: A Normative Analysis

Paoli

Lipińska

2013

SSRN Journal

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in www.econstor.euThis paper presents preliminary fi ndings and is being distributed to economists and other interested readers solely to stimulate discussion and elicit comments. AbstractCountries' concerns about the value of their currency have been studied and documented extensively in the literature. Capital controls can be-and often are-used as a tool to manage exchange rate fl uctuations. This paper investigates whether countries can benefi t from using such a tool. We develop a welfare-based analysis of whether (or, in fact, how) countries should tax international borrowing. Our results suggest that restricting international capital fl ows through the use of these taxes can be benefi cial for individual countries, although it would limit cross-border pooling of risk. The reason is because, while consumption risk-pooling is important, individual countries also care about domestic output fl uctuations. Moreover, the results show that countries decide to restrict the international fl ow of capital exactly when this fl ow is crucial to ensure cross-border risk sharing. Our fi ndings point to the possibility of costly "capital control wars" and thus to signifi cant gains from international policy coordination.

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The Role of Financial Market Structure and the Trade Elasticity for Monetary Policy in Open Economies

Cited by 24 publications

References 55 publications

Optimal monetary policy, exchange rate misalignments and incomplete financial markets

Optimal monetary policy, exchange rate misalignments and incomplete financial markets

On the benefits of a monetary union: Does it pay to be bigger?

Capital Controls: A Normative Analysis

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