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Capital Mobility, Consumption Substitutability and the Effects of Monetary Policy in Open Economies

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  • Christian Pierdzioch

Abstract

I use a dynamic general equilibrium two-country optimizing model to analyze the implications of international capital mobility for the short-run effects of monetary policy in an open economy. The model implies that the substitutability of goods produced in different countries plays a central role for the impact of changes in the degree of international capital mobility on the effects of monetary policy. Paralleling the results of the traditional Mundell-Fleming model, a higher degree of international capital mobility magnifies the short-run output effects of monetary policy only if the Marshall-Lerner condition, which is linked to the cross-country substitutability of goods, holds. Copyright Verein für Socialpolitik and Blackwell Publishing Ltd. 2005.

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Bibliographic Info

Article provided by Verein für Socialpolitik in its journal German Economic Review.

Volume (Year): 6 (2005)
Issue (Month): 1 (02)
Pages: 79-94

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Handle: RePEc:bla:germec:v:6:y:2005:i:1:p:79-94

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  1. Pierpaolo Benigno, 2008. "Price stability with imperfect financial integration," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
  2. Steinsson, Jon, 2003. "Optimal monetary policy in an economy with inflation persistence," Journal of Monetary Economics, Elsevier, vol. 50(7), pages 1425-1456, October.
  3. Obstfeld, Maurice & Rogoff, Kenneth, 1995. "Exchange Rate Dynamics Redux," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 624-60, June.
  4. Benigno, Gianluca & Benigno, Pierpaolo, 2001. "Monetary Policy Rules and the Exchange Rate," CEPR Discussion Papers 2807, C.E.P.R. Discussion Papers.
  5. Klein, Paul, 2000. "Using the generalized Schur form to solve a multivariate linear rational expectations model," Journal of Economic Dynamics and Control, Elsevier, vol. 24(10), pages 1405-1423, September.
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Cited by:
  1. Giovanni Ganelli & Juha Tervala, 2010. "International Transmission of Environmental Policy: A New Keynesian Perspective," Discussion Papers 58, Aboa Centre for Economics.
  2. Tervala, Juha & Engler, Philipp, 2010. "Beggar-thyself or beggar-thy-neighbour? The welfare effects of monetary policy," Discussion Papers 2010/6, Free University Berlin, School of Business & Economics.
  3. Sastre, Luis, 2012. "Simultaneity between export and import flows and the Marshall–Lerner condition," Economic Modelling, Elsevier, vol. 29(3), pages 879-883.

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