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Ebouk Monetary Economics 05
Ebouk Monetary Economics 05
models we consider may be small. They are actually zero for some configurations of
parameters ruling out cross-country spillovers relevant for policymaking, (see Corsetti &
Pesenti, 2005, extend- ing this limiting result to LCP economies). The literature has
recently emphasized these wel- fare results as a reason for skepticism about international
policy cooperation (Canzoneri, Cumby, & Diba, 2005; Obstfeld & Rogoff, 2002). But
the issue of gauging gains from coop- eration is actually wide open, especially in the
presence of real and financial imperfections that may induce national central banks
to play noncooperatively.
44
A long-standing view is that the exchange rate may be driven by nonfundamentals, see Jeanne and Rose
(2002) and Bacchetta and Van Wincoop (2006).
45
For an early contribution on the topic, see Dellas (1988).
46
Other contributions have looked at the optimal policy in a small open-economy, incomplete markets
framework (De Paoli, 2009b). A related literature focuses on optimized simple rules. In Kollmann (2002), for
instance, exchange rate volatility is driven by exogenous shocks to the model’s uncovered interest parity (UIP)
relation: a policy of complete currency stabilization that eliminates these shocks would be optimal for very open
economies, but not for the kind of relatively less open economies we study.