The welfare gains from international coordination of monetary policy are analysed in a two-country model with sticky prices. The gains from coordination
are compared under two alternative structures for financial markets: financial autarky and risk sharing. The welfare gains from coordination are found to be
largest when there is risk sharing and the elasticity of substitution between home and foreign goods is greater than unity. When there is no risk sharing the gains
to coordination are almost zero. It is also shown that the welfare gain from risk sharing can be negative when monetary policy is uncoordinated.
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Last update: August 21, 2002