Global monetary policy under a dollar standard |
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Authors: | Michael B Devereux |
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Institution: | a Department of Economics, University of British Columbia, 997-1873 East Mall, Vancouver, British Columbia, Canada V6T 1Z1 b Department of Economics, The Chinese University of Hong Kong, Shatin, N.T., Hong Kong c Department of Economics, Simon Fraser University, 8888 University Drive, Burnaby, British Columbia, Canada V5A 1S6 |
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Abstract: | This paper derives an optimal monetary policy in a world with a dollar standard, defined as an environment in which all traded goods prices are set in US dollars, so that exchange rate pass-through into the US price level is zero. We show that the US is essentially indifferent to exchange rate volatility, while the rest of the world places a high weight on exchange rate volatility. In a Nash equilibrium of the monetary policy game, US preferences dominate; the equilibrium is identical to one where the US alone chooses world monetary policy. Despite this, we find surprisingly that the US loses from the dollar's role as an international currency, since the absence of exchange rate pass-through leads to inefficient expenditure allocations within the US. Finally, we derive the conditions for a dollar standard to exist. |
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Keywords: | Dollar standard Reference currency Asymmetric pricing Monetary policy Welfare |
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