Optimal Monetary Policy in an Estimated Local Currency Pricing Model

We analyze fluctuations in inflation and the nominal exchange rate under optimal monetary policy with local currency pricing by developing two-country DSGE local currency pricing and producer currency pricing models. We estimate our models using Bayesian techniques with Japanese and US data, and cal...

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Bibliographic Details
Published inDSGE Models in Macroeconomics: Estimation, Evaluation, and New Developments Vol. 28; pp. 39 - 79
Main Authors Okano, Eiji, Eguchi, Masataka, Gunji, Hiroshi, Miyazaki, Tomomi
Format Book Chapter
LanguageEnglish
Published Emerald Group Publishing Limited 2012
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Summary:We analyze fluctuations in inflation and the nominal exchange rate under optimal monetary policy with local currency pricing by developing two-country DSGE local currency pricing and producer currency pricing models. We estimate our models using Bayesian techniques with Japanese and US data, and calculate impulse response functions. Our estimation results show that local currency pricing is strongly supported against producer currency pricing. From the estimated parameters, we show that completely stabilizing consumer price index inflation is optimal from the viewpoint of minimizing welfare costs and that completely stabilizing consumer price index inflation is consistent with completely stabilizing the nominal exchange rate.
ISBN:1781903050
9781781903056
ISSN:0731-9053
DOI:10.1108/S0731-9053(2012)0000028005