Optimal Policy under Dollar Pricing

Abstract

Empirical evidence shows that most international prices are sticky in dollars. This paper studies the policy implications of this fact in the context of an open economy model with general preferences, technologies, asset markets, nominal rigidities, and a rich set of shocks. We show that although monetary policy is less efficient and cannot implement the flexible-price allocation, inflation targeting and a floating exchange rate remain robustly optimal in non-US economies. The capital controls cannot unilaterally improve the allocation and are useful only when coordinated across countries. International cooperation benefits other economies, but is not in the self-interest of the United States. (JEL E31, E52, F14, F31, F38, F41)