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This paper studies monetary policy in an optimizing two-country model. We suppose a two-step production process that is associated with vertical trade. Prices of final consumption goods are sticky and pass-through can be incomplete. Monetary authorities should respond to both home and foreign shocks in this set-up.Which simple, i.e. non-optimal, targeting rule best supports the welfare maximizing policy hinges critically on the degree of the cross-country interdependence in production and the relative importance of productivity and cost-push shocks. We argue that the relative volatility of productivity and cost-push shocks determines whether the monetary authority should follow a price targeting rulewhereas the degree of vertical integration determines which simple price targeting rule (producer or consumer price index targeting) is best.
Effektivität und Effizienz von (makroökonomischer) Wirtschaftspolitik auf globalisierten Märkten
(2012)