Exchange Rate Regimes, Determinacy, and Learnability in a Two-Block World Economy

We study how determinacy and learnability of global rational expectations equilibrium may be accected by monetary policy in a simple, two country, New Keynesian framework. The two blocks may be viewed as the U.S. and Europe, or as regions within the euro zone. We study cases in which optimal policies are being pursued country by country - where exhange rates are floating - as well as types of managed exchange rate regimes, including monetary union. This case is of strong practical relevance for monetary policy analysis in the euro area. We find that new concerns can arise in the analysis of classic topics such as the desirability of exchange rate targeting and monetary conditions indices (MCIs), the so-called "corner solutions" debate, and monetary union.