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International Transmission Effects of Monetary Policy Shocks: Can Asymmetric Price Setting Explain the Stylized Facts?

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Abstract

How does an unexpected domestic monetary expansion a.ect the foreign economy? Does it induce an increase or a decline in foreign production? In the traditional two-country Mundell-Fleming model, monetary policy has «beggar-thy-neighbor» effects. Yet, empirical evidence from VARs indicates that U.S. monetary policy has positive international transmission effects on both foreign (non-U.S. G-7) output and aggregate demand. In this paper, I will show that a two-country dynamic general equilibrium model with sticky prices can account for these «stylized facts» if we allow for international asymmetries in the price-setting behavior of firms. If U.S. firms set export prices in their own currency only (producer-currency pricing), whereas producers in the rest of the world price their exports to the U.S. in the local currency of the export market (local-currency pricing), a U.S. monetary expansion is found to increase output and aggregate demand abroad.

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Bibliographic Info

Paper provided by KOF Swiss Economic Institute, ETH Zurich in its series KOF Working papers with number 05-102.

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Length: 51 pages
Date of creation: Mar 2005
Date of revision:
Handle: RePEc:kof:wpskof:05-102

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Keywords: Local-currency pricing; Producer-currency pricing; New Open Economy Macroeconomics; International transmission effects of monetary policy;

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References

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Citations

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Cited by:
  1. Rüffer, Rasmus & Stracca, Livio, 2006. "What is global excess liquidity, and does it matter?," Working Paper Series 0696, European Central Bank.
  2. Anders C. Johansson, 2012. "China’s Growing Influence in Southeast Asia – Monetary Policy and Equity Markets," The World Economy, Wiley Blackwell, vol. 35(7), pages 816-837, 07.
  3. Tervala, Juha, 2014. "China, the Dollar Peg and U.S. Monetary Policy," MPRA Paper 53223, University Library of Munich, Germany.
  4. Tervala, Juha, 2009. "Export pricing and the cross-country correlation of stock prices," Research Discussion Papers 28/2009, Bank of Finland.
  5. repec:onb:oenbwp:y:2011:i:3:b:1 is not listed on IDEAS
  6. Konstantins Benkovskis & Andrejs Bessonovs & Martin Feldkircher & Julia Wörz, 2011. "The Transmission of Euro Area Monetary Shocks to the Czech Republic, Poland and Hungary: Evidence from a FAVAR Model," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 3.

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