Portfolio Preference Uncertainty and Gains From Policy Coordination

Author/Editor:

Paul R Masson

Publication Date:

June 1, 1991

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

International macroeconomic policy coordination is generally considered to be made less likely—and less profitable—by the presence of uncertainty about how the economy works. The present paper provides a counter-example, in which increased uncertainty about portfolio preference of investors makes coordination of monetary policy more beneficial. In particular, in the absence of coordination monetary authorities may respond to financial market uncertainty by not fully accommodating demands for increased liquidity, for fear of bringing about exchange rate depreciation. Coordinated monetary expansion would minimize this danger. A theoretical model incorporating an equity market is developed, and the stock market crash of October 1987 is discussed in the light of its implications for monetary policy coordination.

Series:

Working Paper No. 91/64

Notes:

Also published in Staff Papers, Vol. 39, No. 1, March 1992.

English

Publication Date:

June 1, 1991

ISBN/ISSN:

9781451848465/1018-5941

Stock No:

WPIEA0641991

Format:

Paper

Pages:

26

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