Monetary cooperation during global inflation surges

Abstract

We study optimal monetary policy during times of global scarcity of tradable goods. The optimal monetary response entails a surge in inflation, which helps rebalance production towards the tradable sector. While the inflation costs are fully bore domestically, however, the gains in terms of higher supply of tradable goods partly spill over to the rest of the world. National central banks may thus fall into a coordination trap, and implement an excessively tight monetary policy causing an unnecessarily sharp global contraction.