A two-country overlapping generations model with fiat monies is used to study international coordination of monetary policies under the flexible exchange rate system. The optimal monetary policy and the welfare of individual countries are investigated...
A two-country overlapping generations model with fiat monies is used to study international coordination of monetary policies under the flexible exchange rate system. The optimal monetary policy and the welfare of individual countries are investigated for: coordination and non-coordination cases. It is shown that the coordination is Pareto superior to the non-coordination. The countries choose more inflationary policies in the non-coordination case; the world output decreases, which depends on the degree of risk aversion.