Inflation in Open Economies with Complete Markets

Marco Celentani (), Klaus Desmet and J. Ignacio Conde-Ruiz

No 4385, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This Paper uses an overlapping generations model to analyse monetary policy in a two-country model with asymmetric shocks. Agents insure against risk through the exchange of a complete set of real securities. Each central bank is able to commit to the contingent monetary policy rule that maximizes domestic welfare. In an attempt to improve their country's terms of trade of securities, central banks may choose to commit to costly inflation in favourable states of nature. In equilibrium the effects on the terms of trade wash out, leaving both countries worse off. Countries facing asymmetric shocks may therefore gain from monetary cooperation.

Keywords: inflation; Risk sharing; Security markets; Terms of trade; Monetary cooperation; Currency union (search for similar items in EconPapers)
JEL-codes: E50 F30 F42 (search for similar items in EconPapers)
Date: 2004-05
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Inflation in Open Economies with Complete Markets (2007)
Working Paper: Inflation in open economies with complete markets
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