Designing targeting rules for international monetary policy cooperation

This study analyzes a two-country dynamic general equilibrium model with nominal rigidities,monopolistic competition and producer currency pricing. A quadratic approximation to the utility ofthe consumers is derived and assumed as the policy objective function of the policymakers.It is shown that only under special conditions there are no gains from cooperation and moreoverthat the paths of the exchange rate and prices in the constrained-efficient solution depend on the kindof disturbance that affects the economy. Despite this result, simple targeting rules that involve onlytargets for the growth of output and for both domestic GDP and CPI inflation rates can replicate thecooperative allocation.[...]