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Capital Mobility, Consumption Substitutability, and the Effectiveness of Monetary Policy in Open Economies

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  • Christian Pierdzioch

Abstract

This paper uses a dynamic general equilibrium two-country optimizing model to analyze the consequences of international capital mobility for the effectiveness of monetary policy in open economies. The model shows that the substitutability of goods produced in different countries plays a central role for the impact of international capital mobility on the effectiveness of monetary policy. Paralleling the results of the traditional Mundell-Fleming model, a higher degree of international capital mobility increases the effectiveness of monetary policy only if the Marshall-Lerner condition, which is linked to the cross-country substitutability of goods, holds.

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File URL: https://www.ifw-members.ifw-kiel.de/publications/capital-mobility-consumption-substitutability-and-the-effectiveness-of-monetary-policy-in-open-economies/kap1110.pdf
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Bibliographic Info

Paper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 1110.

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Length: 24 pages
Date of creation: May 2002
Date of revision:
Handle: RePEc:kie:kieliw:1110

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Keywords: Monetary policy; Capital mobility;

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  1. Stephanie Schmitt-Grohe & Martin Uribe, 2001. "Closing Small Open Economy Models," Departmental Working Papers, Rutgers University, Department of Economics 200115, Rutgers University, Department of Economics.
  2. Maurice Obstfeld and Kenneth Rogoff., 1995. "Exchange Rate Dynamics Redux," Center for International and Development Economics Research (CIDER) Working Papers, University of California at Berkeley C95-048, University of California at Berkeley.
  3. Bennett T. McCallum & Edward Nelson, 2001. "Monetary Policy for an Open Economy: An Alternative Framework with Optimizing Agents and Sticky Prices," NBER Working Papers 8175, National Bureau of Economic Research, Inc.
  4. Jeff Fuhrer & George Moore, 1993. "Inflation persistence," Proceedings, Board of Governors of the Federal Reserve System (U.S.), Board of Governors of the Federal Reserve System (U.S.).
  5. Bennett T. McCallum, 2001. "Should Monetary Policy Respond Strongly to Output Gaps?," NBER Working Papers 8226, National Bureau of Economic Research, Inc.
  6. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 39(1), pages 195-214, December.
  7. Sutherland, Alan, 1996. " Financial Market Integration and Macroeconomic Volatility," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 98(4), pages 521-39, December.
  8. Klein, Paul, 2000. "Using the generalized Schur form to solve a multivariate linear rational expectations model," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 24(10), pages 1405-1423, September.
  9. Marvin Goodfriend, 1990. "Interest rates and the conduct of monetary policy," Working Paper, Federal Reserve Bank of Richmond 90-06, Federal Reserve Bank of Richmond.
  10. Niehans, Jurg, 1975. "Some doubts about the efficacy of monetary policy under flexible exchange rates," Journal of International Economics, Elsevier, Elsevier, vol. 5(3), pages 275-281, August.
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