Uncertainty, policy commitment and international policy coordination

Dong-Geun Han, Purdue University

Abstract

Four essays on international coordination of monetary policy are presented. We examine the role economic uncertainty plays and a possibility of information sharing as a cheap way of coordination. In particular, uncertainty about domestic and exchange rate shocks is considered. We also investigate if international coordination can be undesirable when strategic interactions between government and private agents are taken into account. It is shown that uncertainty is an obstacle to the international coordination. Cost of international coordination is explained by domestic uncertainty and so incentives for international coordination fall with the domestic uncertainty. Too much uncertainty about exchange market reduces the possibility of coordination through exchange rate targeting. We also show that information sharing on domestic shocks are feasible only under the condition that monetary policy transmission and domestic shock transmission have the same signs. We refute the possibility of undesirable international coordination even with strategic interactions between government and private agents. Rather, we offer a new source of welfare gain from the coordination. It is shown that international monetary coordination eliminates inflation bias by solving a credibility problem between government and private agents.

Degree

Ph.D.

Advisors

Carlson, Purdue University.

Subject Area

Economics

COinS