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The Role of Financial Market Structure and the Trade Elasticity for Monetary Policy in Open Economies

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  • KATRIN RABITSCH

Abstract

Imperfect international risk sharing and exchange rate volatility matter for how monetary policy should optimally be conducted in an open economy through affecting policymakers’ terms of trade considerations. I study these motives for a classical and long‐standing question in international monetary economics: the size of potential gains from international policy coordination. In a relatively standard model I allow for various degrees of risk sharing by considering different assumptions on international financial markets, and a large region for the crucial parameter of the trade elasticity. When incomplete markets give rise to high volatility of international prices and poor risk sharing—such as in Corsetti, Dedola, and Leduc (2008)—gains from policy coordination are an order of magnitude larger than previous studies, working under the assumptions of complete markets, suggest.

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  • Katrin Rabitsch, 2012. "The Role of Financial Market Structure and the Trade Elasticity for Monetary Policy in Open Economies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(4), pages 603-629, June.
    • Handle: RePEc:wly:jmoncb:v:44:y:2012:i:4:p:603-629
    DOI: 10.1111/j.1538-4616.2012.00503.x
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    More about this item

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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