Incomplete Exchange Rate Pass-through and International Monetary Policy Cooperation

There is no consensus on the existence of welfare gains from international monetary policy cooperation. This study adds to the debate by providing a new open macroeconomics model with incomplete exchange rate pass-through. We find that, from a global perspective, the welfare gains from international monetary policy cooperation arise with incomplete exchange rate pass-through. Furthermore, the country’s incentive for cooperation increases with its degree of exchange rate pass-through. Cooperation benefits small countries with high pass-through; however, it is disadvantageous to large countries with low pass-through. In addition, when there is in the absence of cooperation, fixed exchange rate regime is preferred for a country suffering from monetary uncertainty, particularly for small economies with high exchange rate pass-through.

“Digital transformation leads to new jobs creation with higher wages.” = Interview with Boris Vujčić, Governor, Croatian National Bank

This year the Lamfalussy Award was received by Boris Vujčić, Governor of the Croatian National Bank. The Lamfalussy Award, established by the National Bank of Hungary is dedicated to recognise exceptional international achievements influencing international monetary policy. We are honored to be able to conduct the following interview with Governor Vujčić, that can help us to better understand the economic policy and thinking in our region, in Central and Eastern Europe.

Inflation targeting: From “constrained discretion” to singularity

In recent years, inflation targeting has become a staple of international monetary policy. The paper considers different challenges this monetary policy regime faces with regard to suppressed inflation, attaining the zero lower bound on the policy interest rates, and committing central banks to simultaneously pursue additional objectives such as financial stability. Inflation targeting has proved inefficient in raising inflation to the target zone from below, and unorthodox monetary policy tools have not proved their validity in this regard yet. As a result, monetary authorities are more inclined to discretion allowing them to compromise different aspects of “pure” inflation targeting. The value of this discretion is based on asymmetric information and boosted by additional functions assumed by central banks. However, it might bring about serious problems of dynamic inconsistency, compounded political uncertainty, and bureaucratic misconduct. Since none of the alternatives to inflation targeting currently looks fully satisfactory, it is concluded that the inflation targeting regime should be transformed to take into account the current situation, but a necessary precondition for the effectiveness of the new regime is enhanced accountability of central banks.