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Exchange rate volatility and cooperation in an incomplete markets’ economy (MF)

Friday 13 March 2020, 2.00PM to 3.00 pm

Speaker(s): Sara Eugeni (Durham)

ABSTRACT: In this paper, we characterize optimal monetary policy in a tractable two-country OLG model where markets are sequentially incomplete. In a non-cooperative environment, central banks have an incentive to increase domestic agents’ wealth by distributing monetary transfers. We show that their actions lead to higher inflation and exchange rate volatility. We prove that cooperation is able to restore the conditionally Pareto optimal allocation by implementing policies that “lean against the wind”. For standard parameter values, the gains from cooperation are not negligible. However, for cooperation to be Pareto improving, countries should be weighted differently in the social welfare function. This could be one of the reasons why countries find cooperation difficult.

Location: A/D271 (above Alcuin Porters)

Admission: All welcome