This paper develops a welfare-based model of monetary policy in an open economy. We focus on the extent to which monetary policy should be employed in maintaining the exchange rate. The traditional approach maintains that exchange rate flexibility is desirable in the presence of real...

This paper investigates the quantitative importance of the expenditure-switching effect in three small open economies: Australia, Canada and the UK, by developing and estimating a structural sticky-price model nesting both producer currency pricing (PCP) and local currency pricing (LCP)...

In theory, nominal exchange rate movements can lead to “expenditure switching” when they generate changes in the relative prices of goods across countries. This paper explores whether the expenditure-switching role of exchange rates has changed in the current episode of significant global...

A two-country sticky-price general equilibrium model is used to examine the implications of the expenditure switching effect for the welfare properties of fixed and floating exchange rate regimes. A comparison between the two regimes shows that the volatility of consumption is unambiguously...

By incorporating the factor of firms' asymmetric price setting behavior into the two-country model with vertical production and trade, we analyze how one country's monetary policy affects the welfare of both countries. We show that an expansionary monetary policy has (i) a beggar-thyself effect...