International Transmission Effects of Monetary Policy Shocks: Can Asymmetric Price Setting Explain the Stylized Facts?
How does an unexpected domestic monetary expansion a.ect the foreign economy? Does it induce an increase or a decline in foreign production? In the traditional two-country Mundell-Fleming model, monetary policy has «beggar-thy-neighbor» effects. Yet, empirical evidence from VARs indicates that U.S. monetary policy has positive international transmission effects on both foreign (non-U.S. G-7) output and aggregate demand. In this paper, I will show that a two-country dynamic general equilibrium model with sticky prices can account for these «stylized facts» if we allow for international asymmetries in the price-setting behavior of firms. If U.S. firms set export prices in their own currency only (producer-currency pricing), whereas producers in the rest of the world price their exports to the U.S. in the local currency of the export market (local-currency pricing), a U.S. monetary expansion is found to increase output and aggregate demand abroad.
Year of publication: |
2005-03
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Authors: | Schmidt, Caroline |
Institutions: | KOF Swiss Economic Institute, Department of Management, Technology and Economics (D-MTEC) |
Subject: | Local-currency pricing | Producer-currency pricing | New Open Economy Macroeconomics | International transmission effects of monetary policy |
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freely available