International monetary policy coordination under asymmetric shocks

Abstract

The purpose of this paper is to show whether international policy coordination may be the best response to economic interdependence. We will study the short-run interactions taking place among interdependent economies, where monetary supply is the instrument used to maintain output and price targets. We develop a macroeconomic model in which countries show different preferences regarding objectives and face asymmetric disturbances, analyzing in strategic terms how monetary policy can deal with real, monetary, and supply shocks. We also show how the superiority of the cooperative solution depends on the sources of the disturbances, the underlying economic framework, and the asymmetry of the preferences.