Optimal policy under dollar pricing

Egorov, Konstantin and Mukhin, Dmitry ORCID: 0000-0003-4067-9110 (2023) Optimal policy under dollar pricing. American Economic Review, 113 (7). 1783 - 1824. ISSN 0002-8282

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Abstract

Empirical evidence shows that most international prices are sticky in dollars. This paper studies the policy implications of this fact in the context of an open economy model with general preferences, technologies, asset markets, nominal rigidities, and a rich set of shocks. We show that although monetary policy is less efficient and cannot implement the flexible-price allocation, inflation targeting and a floating exchange rate remain robustly optimal in non-US economies. The capital controls cannot unilaterally improve the allocation and are useful only when coordinated across countries. International cooperation benefits other economies, but is not in the self-interest of the United States.

Item Type:	Article
Official URL:	https://www.aeaweb.org/journals/aer
Divisions:	Economics
Subjects:	H Social Sciences > HB Economic Theory
JEL classification:	E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level; Inflation; Deflation E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy (Targets, Instruments, and Effects) F - International Economics > F1 - Trade > F14 - Country and Industry Studies of Trade F - International Economics > F3 - International Finance > F31 - Foreign Exchange F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics
Date Deposited:	04 Apr 2023 13:42
Last Modified:	11 Nov 2024 17:45
URI:	http://eprints.lse.ac.uk/id/eprint/118585

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