A Numerical Analysis of Coordinating Monetary Policy under New Keynesian Macroeconomics: Can It Be Accomplished, How Big Are the Effects, and Why?

This paper tests whether or not gains to monetary policy coordination exist in the New Keynesian two country model proposed in Clarida, Gali and Gertler (2002). Major innovations include rigorous numerical analysis that takes advantage of recent techniques proposed by Laffargue (1990) and Klein (2000) and an attention to robustness analysis as advocated by McCallum (1999) by comparing all results to the rational expectations model proposed in Taylor (1980). The major results found are (1) any gains from coordination in Clarida, Gali and Gertler (2002) are not statistically significant, (2) a “simple rule” approach to monetary policy produces policy rules that outperform policy based on discretionary assumptions, regardless of the decision to coordination, and (3) the model in Clarida, Gali and Gertler (2002) can be characterized by a distinct lack of open economy interaction.