Stabilization, Competitiveness, and Risk-Sharing : A Model of Monetary Interdependence

This paper provides a stylized choice-thoretic model to analyze optimal monetary policies among interdependent economies. In response to marcoeconomic shocks, policymakers strike a balance between two objectives. The first is to stabilize marginal costs and markups to offset the distortions associated with nominal rigidities, a dimension that entails no international tension. The second is to influence the terms of international trading in contingent assets. Through this channel, policymakers aim at lowering the relative prices of domestic goods, leading to a transfer of world income in favor of the country's residents. This dimension than entails a zero-sum redistribution of welfare from a worldwide point of view, this need to be true from a national perspective, as the larger country is better of when monetary policy is conducted in decentralized fashion.