On the efficiency of monetary and fiscal policy in open economies

This paper investigates the effciency of monetary and fiscal policy in a two-country general equilibrium model with monopolistic competition and wage stickiness. When monopoly distortions are completely eliminated, we find that stochastic government spending can affect the efficiency of global monetary policy rules that replicate the real allocations under flexible wages under some conditions. When stochastic government spending is present, unlike Obstfeld and Rogoff (2000), we find that the monopoly distortions can also affect the efficiency of global monetary policy rules that replicate the real allocations under flexible wages when the same conditions as the above-mentioned are satisfied. The combination of proportional subsidy policies used to completely eliminate monopoly distortions and the monetary policy rules replicating the real allocations under flexible wages, contrary to Obstfeld and Rogoff (2000), can't achieve utility level under competitive equilibrium in our settings. Fiscal policy is found to be unable to replicate the real allocation under flexible wages.