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Globalization and monetary policy: an introduction

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Enrique Martinez-Garcia

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Abstract

Greater openness has become an almost universal feature of modern, developed economies. This paper develops a workhorse international model, and explores the role of standard monetary policy rules applied to an open economy. For this purpose, I build a two-country DSGE model with monopolistic competition, sticky prices, and pricing-to-market. I also derive the steady state and a log-linear approximation of the equilibrium conditions. The paper provides a lengthy explanation of the steps required to derive this benchmark model, and a discussion of: (a) how to account for certain well-known anomalies in the international literature, and (b) how to start "thinking" about monetary policy in this environment.

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Paper provided by Federal Reserve Bank of Dallas in its series Globalization and Monetary Policy Institute Working Paper with number 11.

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Date of creation: 2008
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Handle: RePEc:fip:feddgw:11

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Keywords: Monetary policy ; Equilibrium (Economics) ; Globalization ; Macroeconomics ; International finance ; Mathematical models;

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