A Study On Monetary Policy Problems In Open Economies

The international trade and capital flows between countries is more often in 21 st century,so the researches on monetary policy in open economies are a key topic,and also attracts great attentions from central banks and economists all over the world.Basing on New Keynesian Model,Obstfeld and Rogoff(1995)builds the New Open Economy Model,which is the first model featuring price stickiness,monopoly competition and the consumers' optimal intertemporal saving choice,and this model becomes the basic tool in the following period.Basing on this method,this paper studies three important issues in the open economies.(1)With the introduction of incomplete exchange-rate passthrough and trade surplus into small open economy model,we estimate structural paprameters using Bayesian method.We study the below questions: whether People's Bank of China takes volatility of RMB exchange rate into account the monetary policy design,and the characteristics of economy flunctuations after exogenous shocks.(2)Nominal wage stickiness and the heterogenous labor share in production fuction are introduced in the simple two countries model(Clarida et al,2002),the implication of which on the monetary policy cooperation are researched.The monetary policy objective function is obtained through the linear-quadratic approximation of households' utitlity function,and the monetary policy includes two different regimes: Nash and cooperation.We calculate the welfare results under these regimes.(3)Erceg and Levin(2006)researches the implicaiont of durable consumption good on optimal monetary polcy design in close economy,and we extend this result into open economy.We build a two countries two sectors open economy model,and analyze the implications of international trade in durable consumption goods on global welfare while the central banks' monetary policies cooperate.We accomplish the first issue in Chapter 2,and find the following results: firstly,the monetary policy reaction function shows insignificant interest rate smoothing features,and the interest rate reacts not only to CPI inflation and output gaps,but also to RMB exchange volatility.Secondly,the incomplete exchange-rate pass-through decreases the volatility of output,CPI inflation and interest rate,and increases the fluctuation of nominal and real exchange rate and the law of one price gap.Thirdly,Domestic shocks are the main causes of output and interest rate.Productivity shocks could explain about 40 percent of output fluctuations,while interest rate shocks could account for 77 percent of interest rate changes.Finally,incomplete exchange rate pass-through reduces the implications of world output shocks on terms of trade,while raise the effects of world inflation shocks.World output shocks and inflation shocks are the main factors for volatility of nominal exchange rate and CPI inflation,respectively.The main purpose of central bank's monetary policy is to stabilize the outer world's shocks.Chapter 3 focuses on the second issue.We study the implication of nominal wage stickiness and heterougenous labor input share on welfare gains in open economy monetary policy cooperation,and find the following results: firstly,there is extra welfare gains in open economy monetary policy cooperation after the inclusion of nominal wiage stickiness,even if the coefficient of risk aversion is unity,which is contrast with the conclustion in Clarida et al(2002).The welfare gain approximately is the 0.31% of the steady state consumption.Secondly,the difference in labor input share could affect the welfare gain in monetary policy cooperation.Given the labor input share in foreign country,the cooperation welfare gain is 0.51% when the labor input share in home country is 0;and welfare gain is 0.98% when labor share is 0.25;and welfare gain is 0.36% when labor share is 0.5 in benchmark model.Whether there exists some relationship needs futher study.Thirdly,we find economic mechanism for cooperation welfare gains through implus response functions.Monetary authority of home country only focuses on inner stability in Nash monetary policy regime,while it has to consider the volatility of foreign country in cooperation policy regime.The output gap declines because of price and nominal wage stickiness,when the world economy is hited by home country technology.Foreign output gap does not deviate from its natural rate in Nash regime,while foreign output gap rises in respond to output declines in home country in cooperation regime.So the correlation between output gaps in both countries is minus in policy cooperation,while zero in Nash game.The former could make households consumption more stable,and share the risk between them.Chapter 4 researches the implication of international trade in durable consumption goods on the welfare gains in open economy monetary policy cooperation.We find the following results: firstly,the volatility of durable consumption goods is 10% deviation from its natural level,while that of nondurable consumption goods is about 4% deviation from natural level,when the world economy is hitted by the nondurable technology shock and monetary authorities in both countries committee the price-wage inflation targeting rule.Secondly,international trade in durable consumption goods could significantly improve the world welfare.We do the sensitivity analysis through assigning different values to depreciation rate of durable goods from the interval [0.03,0.054],and find that welfare gains from international monetary policy cooperation decreases when the depreciation rate increases.The reason is that arise in depreciation rate declines the effect of interest rate on user costs of durable goods,and the regulation power of monetary policy is weaken.Thirdly,the share of durable goods in households' consumption basket,and the share of foreign durable goods in total durable consumptio could also affect the welfare gains in monetary policy cooperation.With the assumption that only the durable goods could engage in international trade,two parameters above both determines the openness degree of home country.The higher the durable share in total consumption and the lower the home durable share in total durable demand,the higher the home country's openness degree,and the welfare gains in monetary policy cooperation will increases.So with the ascending in the share of international trade in durable goods,the necessirities in monetary policy cooperation increases.Finally,stablizing the output volatility in durable good sector is an important way to impove the world welfare.Erceg and Levin(2006)find targeting the wage-price inflation rlue could obtain the welfare under optimal monetary policy.However,in open economies,we get to different point.Targeting the durable output gap in both countries could sufficiently approximate the welfare,while targeting the weighted average of wage-price inflation will increase the welfare loss in open economies.