Optimal Policy under Dollar Pricing
American Economic Review
vol. 113,
no. 7, July 2023
(pp. 1783-1824)
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.Citation
Egorov, Konstantin, and Dmitry Mukhin. 2023. "Optimal Policy under Dollar Pricing." American Economic Review, 113 (7): 1783-1824. DOI: 10.1257/aer.20200636Additional Materials
JEL Classification
- E31 Price Level; Inflation; Deflation
- E52 Monetary Policy
- F14 Empirical Studies of Trade
- F31 Foreign Exchange
- F38 International Financial Policy: Financial Transactions Tax; Capital Controls
- F41 Open Economy Macroeconomics