“Monetary and Exchange Rate Policies in a Global Economy”
by Naoki Yago
University of Cambridge
Place: MA-330
Abstract
A consensus in the small open economy literature is that optimal monetary policy and foreign exchange intervention (FXI) separately stabilize inflation and the exchange rate. I develop an analytically tractable two-country framework where FXI balances internal and external objectives. Under international policy cooperation, optimal FXI mitigates the trade-off between domestic inflation and demand faced by monetary authorities, allowing them to stabilize inflation with moderate changes in the interest rate. At the same time, optimal FXI targets world demand since it affects international prices. The model thus suggests an interaction between conventional monetary policy and unconventional exchange rate policy tools and provides a rationale for their combined use. I further show that FXI contributes more to domestic inflation stabilization when all goods traded in international markets are priced in dollars. Finally, a quantitative exercise shows that, in a non-cooperative equilibrium, FXI exacerbates distortions to world prices and demand.
Bio
Naoki Yago is a PhD student in economics at the University of Cambridge. His research interests are macroeconomics, international macro and finance, monetary economics, and macro-finance.
