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IMPLEMENTING INTERNATIONAL MONETARY COOPERATION THROUGH INFLATION TARGETING

Published online by Cambridge University Press:  01 April 2008

GIANLUCA BENIGNO  and
PIERPAOLO BENIGNO
GIANLUCA BENIGNO*
Affiliation:
London School of Economics
PIERPAOLO BENIGNO
Affiliation:
Luiss Guido Carli
*
Address correspondence to: Gianluca Benigno, Department of Economics and CEP, London School of Economics, Houghton Street, London WC2A 2AE, United Kingdom; e-mail: [email protected].
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Abstract

This paper presents a two-country dynamic general equilibrium model with imperfect competition and nominal price rigidities in which productivity shocks coexist with markup shocks. After analyzing the features of the optimal cooperative solution, we show that this allocation can be implemented in a strategic context through inflation-targeting regimes. Under these regimes, each monetary authority minimizes a quadratic loss function that targets only domestic targets, namely, GDP inflation and the output gap.

Keywords

International Monetary CooperationInflation Targeting
Type
ARTICLES
Information
Macroeconomic Dynamics , Volume 12 , Supplement S1: Dynamic Macroeconomic Theory , April 2008 , pp. 45 - 59
Copyright
Copyright © Cambridge University Press 2008

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