Financial Policy Coordination in a Keynesian Framework

We propose a simple framework within which to examine the problem of policy coordination between two central banks. The context is the various components of a broad measure of the money supply. Consider two central banks, one'monetarist' and the other 'Keynesian'. In each economy there is 'involuntary unemployment' of loans. It is show that the monetary authorities can strategically vary short-term interest rates in order to relax the constraint in the loan market so that none of the players is worse off. Both the banks play a zero-sum game with regard to foreign exchange reserves. Here too, the central banks can, via their influence on prices, increase the profits of firms providing thereby a credible signal to bank.