Economic Theory

, Volume 31, Issue 2, pp 271–291

Inflation in Open Economies with Complete Markets

  • Marco Celentani
  • J. Ignacio Conde-Ruiz
  • Klaus Desmet
Research Article

Abstract

This paper uses an overlapping generations model to analyze monetary policy in a two-country model with asymmetric shocks. Agents insure against risk through the exchange of a complete set of real securities. Each central bank is able to commit to the contingent monetary policy rule that maximizes domestic welfare. In an attempt to improve their country’s terms of trade of securities, central banks choose to commit to costly inflation in favorable states of nature. In equilibrium the effects on the terms of trade wash out, leaving both countries worse off. Countries facing asymmetric shocks may therefore gain from monetary cooperation.

Keywords

Inflation Risk sharing Security markets Terms of trade Monetary cooperation Currency union 

Jel Classification Numbers

E5 F3 F42 

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Copyright information

© Springer-Verlag 2006

Authors and Affiliations

  • Marco Celentani
    • 1
  • J. Ignacio Conde-Ruiz
    • 2
  • Klaus Desmet
    • 3
  1. 1.Department of EconomicsUniversidad Carlos IIIGetafe (Madrid)Spain
  2. 2.Spanish Prime Minister Economic Bureau and FEDEA, Presidencia del GobiernoComplejo de la MoncloaMadridSpain
  3. 3.Department of EconomicsUniversidad Carlos III and CEPRGetafe (Madrid)Spain

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