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Incomplete Exchange Rate Pass-through and International Monetary Policy Cooperation

Published online by Cambridge University Press:  15 November 2021

Zhigang Huang  and
Jie Li
Zhigang Huang
Affiliation:
School of Finance, Central University of Finance and Economics
Jie Li*
Affiliation:
CAFD, Central University of Finance and Economics
*
*Corresponding author. Email: jieli.cn@gmail.com
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Abstract

There is no consensus on the existence of welfare gains from international monetary policy cooperation. This study adds to the debate by providing a new open macroeconomics model with incomplete exchange rate pass-through. We find that, from a global perspective, the welfare gains from international monetary policy cooperation arise with incomplete exchange rate pass-through. Furthermore, the country’s incentive for cooperation increases with its degree of exchange rate pass-through. Cooperation benefits small countries with high pass-through; however, it is disadvantageous to large countries with low pass-through. In addition, when there is in the absence of cooperation, fixed exchange rate regime is preferred for a country suffering from monetary uncertainty, particularly for small economies with high exchange rate pass-through.

Keywords

Incomplete exchange rate pass-throughInternational monetary policy cooperationFixed exchange rate regimeF41F42E61
Type
Articles
Information
Macroeconomic Dynamics , Volume 27 , Issue 2 , March 2023 , pp. 399 - 431
Copyright
© The Author(s), 2021. Published by Cambridge University Press

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