Author: Engel, Charles

Source: The American Economic Review, Volume 101, Number 6, October 2011 , pp. 2796-2822(27)

Publisher: American Economic Association

Abstract:

This paper examines optimal monetary policy in an open-economy two-country world with sticky prices under pricing to market. We show that currency misalignments are inefficient and lower world welfare. We find that optimal policy must target consumer price inflation, the output gap, and the currency misalignment. The paper derives the loss function of a cooperative monetary policymaker and the optimal targeting rules. The model is a modified version of Clarida, Galí, and Gertler (JME, 2002). The key change is that we allow pricing to market or local-currency pricing and consider the policy implications of currency misalignments.

Document Type: Research article

DOI: http://dx.doi.org/10.1257/aer.101.6.2796

Publication date: 2011-10-01

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• The American Economic Review is a general-interest economics journal. The journal is published quarterly and contains articles on a broad range of topics. Established in 1911, the AER is among the nation's oldest and most respected scholarly journals in the economics profession.
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