Choose an application

• Reference Manager
• EndNote
• RefWorks (Direct export to RefWorks)

This paper examines optimal monetary policy in an open-economy two-country model with sticky prices. We show that currency misalignments are inefficient and lower world welfare. We find that optimal policy must target not only inflation and the output gap, but also the currency misalignment. However the interest rate reaction function that supports this targeting rule may involve only the CPI inflation rate. This result illustrates how examination of "instrument rules" may hide important trade-offs facing policymakers that are incorporated in "targeting rules". The model is a modified version of Clarida, Gali, and Gertler's (JME, 2002). The key change is that we allow pricing to market or local-currency pricing and consider the policy implications of currency misalignments. Besides highlighting the importance of the currency misalignment, our model also gives a rationale for targeting CPI, rather than PPI, inflation.

Zonder onderwerpscode: economie

Choose an application

• Reference Manager
• EndNote
• RefWorks (Direct export to RefWorks)

This paper develops a two-country monetary DSGE model in which households choose a portfolio of home and foreign equities, and a forward position in foreign exchange. Some nominal goods prices are sticky. Trade in these assets achieves the same allocations as trade in a complete set of nominal state-contingent claims in our linearized model. When there is a high degree of price stickiness, we show that not much equity diversification is required to replicate the complete-markets equilibrium when agents are able to hedge foreign exchange risk sufficiently. Moreover, temporarily sticky nominal goods prices can have large effects on equity portfolios even when dividend processes are very persistent.

Finance --- Business & Economics --- Investment & Speculation --- Hedging (Finance) --- Foreign exchange rates. --- Exchange rates --- Fixed exchange rates --- Flexible exchange rates --- Floating exchange rates --- Fluctuating exchange rates --- Foreign exchange --- Rates of exchange --- Rates --- Options (Finance) --- Speculation --- Financial futures --- Banks and Banking --- Investments: Stocks --- Macroeconomics --- Money and Monetary Policy --- International Finance: General --- Foreign Exchange --- Open Economy Macroeconomics --- Portfolio Choice --- Investment Decisions --- Pension Funds --- Non-bank Financial Institutions --- Financial Instruments --- Institutional Investors --- Price Level --- Inflation --- Deflation --- Monetary Systems --- Standards --- Regimes --- Government and the Monetary System --- Payment Systems --- Macroeconomics: Consumption --- Saving --- Wealth --- Financing Policy --- Financial Risk and Risk Management --- Capital and Ownership Structure --- Value of Firms --- Goodwill --- Investment & securities --- Monetary economics --- Financial services law & regulation --- Stocks --- Sticky prices --- Currencies --- Consumption --- Hedging --- Financial institutions --- Prices --- Money --- Financial regulation and supervision --- National accounts --- Economics --- Financial risk management --- United States