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INTERNATIONAL TRANSMISSION OF MONETARY SHOCKS WITH INTEREST RATE RULE Abstract: This paper explores the implications of monetary policy rules in the general equilibrium two-country framework of Obstfeld and Rogo (1995). It is argued that the sign of the correlation of domestic and foreign outputs can be positive after a monetary shock, contrary to the standard result. The reason is that an interest rate rule targeting the consumer price index implies less volatile terms of trade and this reduces the expenditure switching e¤ect, and thus the demand e¤ect through the fall of the real interest rate prevails. It is also shown that inertia in the interest rate rule is a necessary condition for the model to display persistence of the real variables after a shock to the interest rate rule

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  • Carlos Borondo

    (University of Valladolid)

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  • Carlos Borondo, 2000. "INTERNATIONAL TRANSMISSION OF MONETARY SHOCKS WITH INTEREST RATE RULE Abstract: This paper explores the implications of monetary policy rules in the general equilibrium two-country framework of Obstfe," Working Papers 00-04, Asociación Española de Economía y Finanzas Internacionales.
    • Handle: RePEc:aee:wpaper:0004
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    References listed on IDEAS

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    1. Obstfeld, Maurice & Rogoff, Kenneth, 1995. "Exchange Rate Dynamics Redux," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 624-660, June.
    2. Julio J. Rotemberg & Michael Woodford, 1998. "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy: Expanded Version," NBER Technical Working Papers 0233, National Bureau of Economic Research, Inc.
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    5. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2000. "Sticky Price Models of the Business Cycle: Can the Contract Multiplier Solve the Persistence Problem?," Econometrica, Econometric Society, vol. 68(5), pages 1151-1180, September.
    6. McCallum, Bennett T. & Nelson, Edward, 1999. "Nominal income targeting in an open-economy optimizing model," Journal of Monetary Economics, Elsevier, vol. 43(3), pages 553-578, June.
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    8. David K. Backus & Patrick J. Kehoe & Finn E. Kydland, 1992. "Dynamics of the trade balance and the terms of trade: the J-curve revisited," Discussion Paper / Institute for Empirical Macroeconomics 65, Federal Reserve Bank of Minneapolis.
    9. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 115(1), pages 147-180.
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    Cited by:

    1. Rüffer, Rasmus & Stracca, Livio, 2006. "What is global excess liquidity, and does it matter?," Working Paper Series 696, European Central Bank.
    2. David D. VanHoose, 2004. "The New Open Economy Macroeconomics: A Critical Appraisal," Open Economies Review, Springer, vol. 15(2), pages 193-215, April.

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    More about this item

    Keywords

    Monetary Policy Rules; International Transmission; Staggered Prices; Two-Country model;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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