SAFE Working Paper No. 377

Optimal Policy under Dollar Pricing

Recent empirical evidence shows that most international prices are sticky in dollars. This paper

studies the policy implications of this fact in the context of an open economy model, allowing for an

arbitrary structure of asset markets, general preferences and technologies, time- or state-dependent

price setting, and a rich set of shocks. We show that although monetary policy is less ecient

and cannot implement the exible-price allocation, ination targeting and a oating exchange rate

remain robustly optimal in non-U.S. economies. The capital controls cannot unilaterally improve the

allocation and are useful only when coordinated across countries. Thanks to the dominance of the

dollar, the U.S. can extract rents in international goods and asset markets and enjoy a higher welfare

than other economies. Although international cooperation benets other countries by improving

global demand for dollar-invoiced goods, it is not in the self-interest of the U.S. and may be hard to