A Quantitative Perspective On Optimal Monetary Policy Cooperation Between The US And The Euro Area

The objective of this paper is to examine the main features of optimal monetary policy cooperation within a micro-founded macroeconometric framework. First, using Bayesian techniques, the authors estimate a two-country Dynamic Stochastic General Equilibrium (DSGE) model for the United States (US) and the Euro Area (EA). The main features of the New Open Economy Macroeconomics (NOEM) are embodied in the framework: in particular, imperfect exchange rate pass-through and incomplete financial markets internationally. Each country model incorporates the wide range of nominal and real frictions found in the closed-economy literature: staggered price and wage settings, variable capital utilization and fixed costs in production.