| This dissertation consists of an introductory chapter and two main chapters, both of which focus on theoretical aspects of optimal monetary policy in the open economy. The introductory chapter offers a historical overview of the development of the modern international monetary system and highlights the fact that the literature on optimal exchange rate regimes has evolved in isolation from the literature on optimal monetary policy. Instead of viewing the two as separate issues, I argue that the goal should be to reconcile exchange rate stability with provision of output and unemployment stability in a credible low inflation environment.; The second chapter uses a two-country, monetary general equilibrium model with imperfect competition to study the optimal rate of inflation in an open economy. It demonstrates that an optimizing monetary authority faces an incentive to use the inflation tax to gain a “beggar-thy-neighbor” advantage over the terms of trade. Strategic use of the inflation tax, however, results in a coordination failure that reduces overall welfare. International monetary cooperation helps to mitigate this coordination failure and, as a result, can lead to more efficient equilibria.; Finally, the third chapter derives a version of the Barro and Gordon time consistency problem in a New Keynesian Open Economy model with reputation. A key finding is that the Friedman rule emerges as one of multiple Markov perfect equilibria. This has two interesting implications. First, in an open economy there exists a discretionary equilibrium that pareto dominates the non-cooperative equilibrium under commitment. Second, there is a divergence between the optimal policy and the policy that maximizes the value that a central bank places on its reputation. |
