Coordinated or Uncoordinated Monetary Policy under a Regime of Flexible Exchange Rates? – The Power in Decision Making

The analysis deals with the conditions under which coordination is attractive to a country in the flexible exchange-rate system. In particular, great weight is attached to the design of a common policy-decision council. The starting point is the Barro- Gordon approach, which is extended to address a regime of flexible exchange rates. For this purpose, the monetary transmission process – the Lucas-type supply curve – is modified. The welfare criterion of the analysis is the expected loss. Losses arise owing to output-supply shocks and nominal-exchange-rate shocks. In the study, two types of coordinated equilibria and the Nash equilibrium are addressed. The results depend on the relative sizes of the countries and their importance in the policycoordination process. In addition, the degree of labour mobility affects the results.