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  4. October 2011
  5. Currency Misalignments and Optimal Monetary Policy: A Reexamination

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

Currency Misalignments and Optimal Monetary Policy: A Reexamination

  • Charles Engel
American Economic Review
vol. 101, no. 6, October 2011
(pp. 2796–2822)
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Abstract

This paper examines optimal monetary policy in an open-economy two-country world with sticky prices under pricing to market. We show that currency misalignments are inefficient and lower world welfare. We find that optimal policy must target consumer price inflation, the output gap, and the currency misalignment. The paper derives the loss function of a cooperative monetary policymaker and the optimal targeting rules. The model is a modified version of Clarida, Galí, and Gertler (JME, 2002). The key change is that we allow pricing to market or local-currency pricing and consider the policy implications of currency misalignments. (JEL E52, F31, F41)

Citation

Engel, Charles. 2011. "Currency Misalignments and Optimal Monetary Policy: A Reexamination." American Economic Review, 101 (6): 2796–2822. DOI: 10.1257/aer.101.6.2796

Additional Materials

JEL Classification

  • E52 Monetary Policy
  • F31 Foreign Exchange
  • F41 Open Economy Macroeconomics