Monetary Spillovers and Endogenous Comparative Advantage in an Unionized Two-Country World

There are many papers written on how price and wage rigidity can cause monetary policy to generate real effects on the economy. In those that incorporate open-economy considerations, monetary changes in one country also has an impact on other economies. In this paper, an attempt is made to add to this literature on monetary spillovers by endogenizing comparative advantage, hence allowing it to be affected by monetary changes. In a symmetric two-country model, the spillover effects of monetary expansion in one country on the other is found to be smaller than under the assumption of exogenously fixed comparative advantage. An implication in that there will be lower benefits to monetary coordination and therefore, the likelihood of such cooperation between countries is aslo reduced.