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Asymmetries in an open economy model

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  • Sousa, Teresa Vasconcelos e

Abstract

This paper revisits interdependence in a NOEM framework introducing two asymmetries in a two-country general equilibrium model of the world economy with imperfect competition and nominal rigidities: a world with asymmetric nominal rigidities, where one country has flexible prices and the other sticky prices, and a world with asymmetric behavior from monetary policymakers, where one country non-optimally sets a constant nominal exchange rate. We show that the welfare loss is not dependent on the variance of the productivity shock in the first asymmetric world. As regards the second asymmetry we show that welfare gains arise under discretionary policy if the shock is higher than expected by agents at the cost of a welfare loss to the other country, whereas under monetary policy with rules a welfare loss happens in both countries. We also call into question the zero lower bound constraint in an open economy, endorsing expectations of price increases as an escape from a liquidity trap.

Suggested Citation

  • Sousa, Teresa Vasconcelos e, 2013. "Asymmetries in an open economy model," Journal of International Money and Finance, Elsevier, vol. 33(C), pages 358-380.
    • Handle: RePEc:eee:jimfin:v:33:y:2013:i:c:p:358-380
    DOI: 10.1016/j.jimonfin.2012.11.019
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    References listed on IDEAS

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    1. Giancarlo Corsetti & Paolo Pesenti, 2001. "Welfare and Macroeconomic Interdependence," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 116(2), pages 421-445.
    2. Giancarlo Corsetti, 2008. "A Modern Reconsideration of the Theory of Optimal Currency Areas," Economics Working Papers ECO2008/12, European University Institute.
    3. Michael B. Devereux & Charles Engel, 2003. "Monetary Policy in the Open Economy Revisited: Price Setting and Exchange-Rate Flexibility," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 70(4), pages 765-783.
    4. Canzoneri, Matthew B. & Cumby, Robert E. & Diba, Behzad T., 2005. "The need for international policy coordination: what's old, what's new, what's yet to come?," Journal of International Economics, Elsevier, vol. 66(2), pages 363-384, July.
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    More about this item

    Keywords

    International policy cooperation; Optimal monetary policy; Nominal rigidities; International transmission mechanism; Zero lower bound;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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