Optimal Monetary Policy In Open Economies

This paper studies optimal monetary stabilization policy in interdependent open economies, by proposing a unified analytical framework systematizing the existing literature. In the model, the combination of complete exchange-rate pass-through (‘producer currency pricing’) and frictionless asset markets ensuring efficient risk sharing, results in a form of open-economy 'Divine coincidence': in line with the prescriptions in the baseline New-Keynesian setting, the optimal monetary policy under cooperation is characterized by exclusively inward-looking targeting rules in domestic output gaps and GDP-deflator inflation.