Optimal monetary policy with endogenous export participation (working paper)

Abstract

This paper studies two often cited benefits of international monetary cooperation - lower inflation and increased international trade. I embed a model of endogenous export participation due to per period export costs within a standard monetary model of the business cycle. Endogenous export participation has two implications: policy competition between countries is more aggressive and the welfare gain from cooperation is magnified. Because high inflation also acts to raise firm export costs monetary cooperation offers an alternative explanation for rising numbers of exported products.