International Transmission of Monetary Policy
1986 (English)Report (Other academic)
A new framework for the study of international transmission of policies is presented. A stochastic two-country neoclassical rational expectations model with sticky prices - although optimally set by monopolistically competitive firms - and possible excess capacity is developed. The model is used to examine international spillover effects in output of monetary disturbances. The Mundell-Fleming model, still the workhorse of international macroeconomics, predicts that a monetary expansion at home leads to a recession abroad. In contrast, the main result in this paper is that spillover effects of monetary policy may be either positive or negative, depending upon demand parameters, more precisely whether home and foreign goods are Edgeworth-Pareto complements or substitutes. The latter in turn depends on the relative size of intertemporal and intratemporal elasticities of substitution in consumption. Trade balance responses also depend on these parameters. The model in addition allows nominal and real interest rates, exchange rates, and other asset prices to be rigorously derived. The asset prices responses depend crucially on the information content of the shocks.
Place, publisher, year, edition, pages
Stockholm: IIES , 1986. , 44 p.
Seminar Paper / Institute for International Economic Studies, Stockholm University, ISSN 0347-8769 ; 362
IdentifiersURN: urn:nbn:se:su:diva-41543OAI: oai:DiVA.org:su-41543DiVA: diva2:331115