2026-04-13T02:12:34Zhttps://recercat.cat/oai/request

oai:recercat.cat:10230/344802025-12-17T01:46:57Zcom_2072_6col_2072_452953

00925njm 22002777a 4500 dc Corsetti, Giancarlo author Dedola, Luca author Leduc, Sylvain author 2018-04-26T09:57:51Z 2018-04-26T09:57:51Z 2018-03 What determines the optimal monetary trade-off between internal objectives (inflation, and output gap) and external objectives (competitiveness and trade imbalances) when inefficient capital flows cause exchange rate misalignment and distort current account positions? We characterize this trade-off analytically, using the workhorse model of modern monetary theory in open economies under incomplete markets–where inefficient capital flows and exchange rate misalignments can arise independently of nominal distortions. We derive a quadratic approximation of the utility-based global policy loss function under fairly general assumptions on preferences and openness, and solve for the optimal targeting rules under cooperation. We show that, in economies with a low degree of exchange rate pass-through, the optimal response to inefficient capital inflows associated with real appreciation is contractionary, above and beyond the natural rate: the optimal policy curbs excessive demand at the cost of exacerbating currency overvaluation. In contrast, a high degree of pass-through, and/or low trade elasticities, warrants expansionary policies that lean against exchange rate appreciation and competitive losses, at the cost of inefficient inflation. The ADEMU Working Paper Series is being supported by the European Commission Horizon 2020 European Union funding for Research & Innovation, grant agreement No 649396. Currency misalignments Trade imbalances Asset markets and risk sharing Optimal targeting rules International policy cooperation Exchange rate pass-through Exchange rate misalignment, capital flows, and optimal monetary policy trade-offs