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Excess Capacity, Monopolistic Competition, and International Transmission of Monetary Disturbances

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  • Svensson, Lars E O
  • van Wijnbergen, Sweder

Abstract

A stochastic, two-country, neoclassical, rational-expectations model with sticky prices--optimally set by monopolistically competitive firms--and possible excess capacity is developed to examine international spillover effects on output of monetary disturbances. The Mundell-Fleming model predicts that monetary expansion at home leads to recession abroad. In contrast, the main result is that spillover effects of monetary policy may be either positive or negative, depending upon whether the intertemporal elasticity of substitution in consumption exceeds the intratemporal elasticity of substitution. The model, in addition, is used to determine nominal and real interest rates, exchange rates, and other asset prices. Copyright 1989 by Royal Economic Society.

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Bibliographic Info

Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 99 (1989)
Issue (Month): 397 (September)
Pages: 785-805

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Handle: RePEc:ecj:econjl:v:99:y:1989:i:397:p:785-805

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  1. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
  2. Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS) 64, University of Warwick, Department of Economics.
  3. Aizenman, Joshua, 1989. "Monopolistic competition, relative prices, and output adjustment in the open economy," Journal of International Money and Finance, Elsevier, vol. 8(1), pages 5-28, March.
  4. Feltenstein, Andrew & Lebow, David & van Wijnbergen, Sweder, 1990. "Savings, Commodity Market Rationing, and the Real Rate of Interest in China," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 22(2), pages 234-52, May.
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