Coordination and price shocks: an empirical analysis

This paper outlines a new technique, which makes optimal control in a stoch astic minimum variance framework computationally feasible. The new approach is then used to evaluate gains to policy coordination in the context of a macroeconometric model for the G-3. More specifically, we consider policy r esponses to a temporary price shock in a single country and in multi-countr y cases. The results show that coordination brings about a striking improve ment in the overall control of inflation and a reduction in output costs. ( C) 2001 Elsevier Science B.V. All rights reserved.