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|کد مقاله||سال انتشار||تعداد صفحات مقاله انگلیسی||ترجمه فارسی|
|5229||2013||16 صفحه PDF||سفارش دهید|
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Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت)
Journal : Journal of International Money and Finance, Volume 32, February 2013, Pages 462–477
This paper investigates the manners in which international cooperation in monetary policies affects the rate of inflation in a two-country sticky-price model. Within reasonable parameter values, international monetary coordination increases the steady-state inflation for given tax policies. When the tax regime is endogenously chosen, however, self-oriented monetary policies can engage in competitive depreciation and induce a higher average inflation than the first best inflation rate.
In recent years, there have been calls for Japan and China to alter their exchange-rate policies. While Japan's efforts to weaken the yen and China's implicit peg to the U.S. dollar may be good for domestic employments in these economies, the policies can trigger competitive depreciations and systematic inflation. China has begun to pose concerns about inflation and is often thought to signal the upcoming revaluation. Are these policies good for Japan and China but bad for the rest of the world? Would Japan, China, and the rest of the world achieve a better management of inflation with increased international cooperation on exchange-rate policies? Rogoff (1985) provides one answer to these questions. He argues that increased international monetary cooperation may raise the rate of inflation. Using a sophisticated modern framework, Obstfeld and Rogoff (1995) also show that the surprise monetary expansion has a positive welfare spillover. In light of these prominent papers, has the Mundell–Fleming–Dornbusch result of competitive devaluation become outdated? More recent literature suggests that this is not the case. Some studies (Betts and Devereux (2000) and Jensen (1997), among others) show that monetary expansion can produce a negative welfare spillover under enriched environments. In considering these pros and cons, the literature thus far assumes that no distorting taxes are present or that taxes merely play secondary roles in supporting the monetary policy. In reality, taxes distort decision making in the private sector, and it is interesting to discover what happens if we relax these assumptions. This paper addresses this question and finds that, in the absence of an endogenous choice of tax policies, international monetary cooperation raises the rate of inflation. On the other hand, if taxes are set in accordance with the monetary regime, competitive depreciation is possible. Our model considers a two-country economy similar to that of Obstfeld and Rogoff (1995, 2000), except for the presence of distorting taxes. Goods markets are under monopolistic competition and the prices in producers' currencies are set before the technology shock occurs. Prices are inefficiently high due to monopoly markups and price setting under uncertainty, which potentially motivates governments to correct. Since the tax policy is chosen by collective opinions within a country, it has an implementation lag and cannot react to ex-post productivity shocks. The monetary policy, on the other hand, is implemented by a delegated decision-maker such as the central bank and can be determined under discretion. Prices are sticky and hence do not respond to policy shocks in the short run. Once prices are set and all shocks have been revealed, each monetary authority supplies money. We examine how the optimal rate of money growth changes with cooperation between monetary authorities. This paper assumes that governments monitor utility from consumption and the disutility of work effort. Owing to the law of one price and unit intratemporal elasticity,1 consumptions are equated and produce no conflict between nations. However, since there are no markets to trade the risks of country-specific fluctuations in production, labor is a source of conflict between the objectives of different countries. Each monetary authority has the incentive to use contractions to reduce work efforts in favor of their own country and expansions to increase consumption. By cooperating, countries endogenize the exchange rate externality that improves the purchasing power of foreign residents. Other things being equal, each central bank depends on the other to expand its money supply and to benefit overseas consumers, at the cost of reducing their own residents' leisure. This positive welfare spillover can be overturned, however, when distorting taxes are endogenously determined. If a fiscal authority switches its objective in accordance with the international cooperation regime, the Pigouvian subsidy is optimal under cooperation and the coordinated monetary policy produces no inflation or deflation. On the other hand, under reasonable parameter values, the self-oriented tax policy can be less likely to boost the aggregate demand compared to the monetary policy, which gives the monetary policy an incentive to engage in competitive depreciation. One of the most notable results on the international welfare spillover of monetary policy is the “beggar-thy-neighbor” effect indicated by Mundell (1963, 1964), Flemming (1962), and Dornbusch (1976). In contrast to these works, Rogoff (1985) analyzes a reduced-form model and argues that inflation might be systematically higher under monetary cooperation than under monetary noncooperation. Obstfeld and Rogoff (1995) further develop a model using micro-foundation, which analyzes the short-run deviation from the steady state and demonstrates that monetary surprise has a positive welfare spillover. Such a property of monetary expansion, that is, the beggar-thy-self effect, corresponds to the case of exogenous tax determination in this paper.2 Under enriched environments, however, it became apparent that monetary cooperation can be welfare improving. Jensen (1997) qualifies Rogoff's result (1985) by arguing that if wage-setters are non-atomistic and inflation averse, cooperation leads to higher employment and possibly lower inflation. Betts and Devereux (2000) consider the pricing-to-market model in which the relative risk aversion is limited to unity. They show that a monetary authority has an incentive to engage in competitive depreciation for a high degree of pricing-to-market. In addition, although the interest of their paper is not necessarily policy coordination, Corsetti et al. (2000) develop a center-periphery model and show that devaluation can be the optimal strategy for neighboring countries. Tille (2001) also demonstrates that positive monetary shocks have a beggar-thy-neighbor effect if home and foreign goods are close substitutes. This paper contributes to this body of literature by demonstrating the case in which monetary cooperation can produce a lower inflation with the generalized specification of tax schemes. Clarida et al. (2002) design the production subsidy such that the steady-state inflation is zero a priori and analyze how well the monetary policy can offset unanticipated disturbances. Benigno and Benigno (2003) show the importance of sales tax in controlling the inflationary bias of the monetary policy. They derive the condition in which price stability is efficient in a two-country model, but the behavior of a biased monetary policy is not fully articulated. It is important to note, however, that a more detailed policy implication can be obtained in an environment in which distorting taxes affect the private sector's behaviors as in the real world. Braun (1994) argues that personal and corporate income tax rates have significant effects on postwar US business cycle fluctuations. Benigno and Woodford (2005) suggest that assuming an output subsidy that attains the zero-inflation steady state is not realistic, and propose to analyze the steady state in which output is inefficient owing to the distorting taxes on sales revenues or labor income, in addition to the monopoly markups. In light of these observations, our producer–consumer economy analyzes the systematic inflation/deflation, that is, how the monetary policy behaves in the distorted steady state, by considering two cases: one with constant sales taxes and the other with sales taxes synchronized with monetary regimes. Our framework that the monetary policy can have a negative welfare spillover is consistent with Svensson and Wijnbergen (1989). Using a multi-period model, they show that monetary spillover effects may be either positive or negative, depending upon whether the intertemporal elasticity of substitution exceeds the intratemporal elasticity of substitution. In their model, goods markets open before asset markets, and monetary policy affects the economy of tomorrow. In our model, since money transfer occurs before goods trading, the monetary policy works today. The inverse of the consumption elasticity of money demand in the present paper corresponds to their intertemporal elasticity. We clarify that, even without savings devices, monetary expansion can have either a positive or a negative international spillover. This paper is organized as follows. Section 2 outlines the analytical framework. In Section 3, we derive a closed-form solution for the private sector's equilibrium. Section 4 discusses the monetary policy and provides the numerical implications. Section 5 discusses the effects of a tax policy. Section 6 concludes the paper.
نتیجه گیری انگلیسی
This paper has analyzed how the international cooperation of monetary policies alters the inflation rate in a simple sticky-price model. We have examined whether the traditional analysis of the beggar-thy-neighbor incentive of monetary policy, and thereby, competitive depreciation, exists or not. For the given tax rates, international monetary policy cooperation increases the average inflation rate. This result arises irrespective of whether or not the fiscal tax eliminates the monopoly distortions. When tax rates are set optimally to maximize the welfare in each regime, monetary cooperation can eliminate the inflation bias under noncooperation if the expenditure-changing effect of monetary policy is sufficiently strong, restoring the competitive depreciation story. Under the small expenditure-changing effect, on the other hand, cooperation prevents the deflation that would emerge under a noncooperative regime. One caveat is that the examined alternative setup assumes that the fiscal and monetary authorities share the same functional form of the objective. It is also interesting to examine the cases in which the fiscal and monetary authorities have separate policy objectives. For instance, we can consider the provision of public goods in the fiscal objective. For future research, we plan to relax the assumption of the law of one price and introduce local currency pricing into the environment of endogenous tax. Since the existing literature indicates that pricing-to-market itself can produce competitive depreciation, it is meaningful to see whether the combination of these two elements overturns the traditional beggar-thy-neighbor property again. Another possible extension is a multi-period model. While we focused on the two-period setting for the purpose of insulating intratemporal issues from intertemporal ones, the introduction of asset trading would provide an additional element with which policymakers evaluate welfare effects. When we consider repeated games, the time-consistency features may also arise. Further, it is worth examining the equivalence of a sales tax and other types of distorting taxes, such as a consumption tax. Although this is beyond the scope of this paper, considering government expenditure in addition to distorting taxes would also provide insightful results. Government spending increases the supplier's income and hours worked and can further alter the equilibrium. For instance, public consumption goods such as education and health care would also improve the utility of residents. Another possibility is the impact on productivity. The infrastructure that the government invests in can work as the public input of private production. Moreover, government measures against environmental pollution might ultimately stimulate labor productivity, which this paper treats as a stochastic exogenous variable. In either case, government expenditure is likely to fall in the domestic market, and thus, it might produce an additional mechanism in which cooperation alters the inflation.