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Production interdependence and welfare

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  • Kevin X.D. Huang
  • Zheng Liu

Abstract

The international welfare effects of a country’s monetary policy shocks have been controversial in the literature. While a unilateral monetary expansion increases the production efficiency in each country, it affects terms of trade in favor of one country against another depending on the currencies of price setting. We show that the increased world production interdependence magnifies the efficiency-improvement effect while dampening the terms-of-trade effect. As a consequence, a unilateral monetary expansion can be mutually beneficial and thus Pareto improving regardless of in which currency unit prices are set. In this sense, international monetary policy transmission may not be a source of potential conflict in a world with production interdependence.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Kansas City in its series Research Working Paper with number RWP 04-04.

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Date of creation: 2004
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Handle: RePEc:fip:fedkrw:rwp04-04

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Keywords: Welfare ; Monetary policy ; Monopolistic competition ; Competition ; Production (Economic theory);

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Cited by:
  1. Zheng Liu & Evi Pappa, 2005. "Gains from coordination in a multi-sector open economy : does it pay to be different?," LSE Research Online Documents on Economics 525, London School of Economics and Political Science, LSE Library.
  2. Berger, Wolfram, 2006. "International interdependence and the welfare effects of monetary policy," International Review of Economics & Finance, Elsevier, vol. 15(4), pages 399-416.
  3. Liu, Zheng & Pappa, Evi, 2005. "Gains from international monetary policy coordination: does it pay to be different?," Working Paper Series 0514, European Central Bank.
  4. Kanda Naknoi & Michael Kumhof & Douglas Laxton, 2005. "On the Benefits of Exchange Rate Flexibility under Endogenous Tradedness of Goods," Computing in Economics and Finance 2005 405, Society for Computational Economics.

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