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Price and trade effects of exchange rates fluctuations and the design of policy coordination

Author: Cohen, Daniel ; Wyplosz, CharlesINSEAD Area: Economics and Political Science Series: Working Paper ; 90/50/EPS Publisher: Fontainebleau : INSEAD, 1990.Language: EnglishDescription: 25 p.Type of document: INSEAD Working Paper Online Access: Click here Abstract: This paper analyses a two-country zone facing a joint inflationary shock and responding with coordinated and uncoordinated monetary and fiscal policies. It is shown that the standard presumption that the absence of coordination results in an excessive exchange rate appreciation of the zone with respect to the rest of the world hinges on a specific assumption : within the two countries considered, the price effect of exchange rate fluctuationsdominates the trade effects relatively to the corresponding effects vis à vis the rest of the world. If the relative hierarchy goes the other way around (as is argued likely for EC countries), the standard conclusion is reversed, resulting in insufficiently active monetary and fiscal policies. The paper also considers asymmetric shocks as well as monetary policy coordinations
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This paper analyses a two-country zone facing a joint inflationary shock and responding with coordinated and uncoordinated monetary and fiscal policies. It is shown that the standard presumption that the absence of coordination results in an excessive exchange rate appreciation of the zone with respect to the rest of the world hinges on a specific assumption : within the two countries considered, the price effect of exchange rate fluctuationsdominates the trade effects relatively to the corresponding effects vis à vis the rest of the world. If the relative hierarchy goes the other way around (as is argued likely for EC countries), the standard conclusion is reversed, resulting in insufficiently active monetary and fiscal policies. The paper also considers asymmetric shocks as well as monetary policy coordinations

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