IMPLEMENTING INTERNATIONAL MONETARY COOPERATION THROUGH INFLATION TARGETING

Abstract

This paper presents a two-country dynamic general equilibrium model with imperfect competition and nominal price rigidities in which productivity shocks coexist with markup shocks. After analyzing the features of the optimal cooperative solution, we show that this allocation can be implemented in a strategic context through inflation-targeting regimes. Under these regimes, each monetary authority minimizes a quadratic loss function that targets only domestic targets, namely, GDP inflation and the output gap.