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The Extensive Margin of Trade under Alternative Monetary Policy Regimes

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  • Stéphane Auray

    ()
    (Université Lille 3 (GREMARS), Université de Sherbrooke (GREDI) and CIRPÉE)

  • Aurélien Eyquem

    (GATE, UMR 5824, Université de Lyon and Ecole Normale Supérieure Lettres et Sciences Humaines, France)

  • Jean-Christophe Poutineau

    (CREM, UMR 6211, Université de Rennes 1 and Ecole Normale Supérieure de Cachan, France)

Abstract

This paper investigates the impact of alternative monetary policy regimes on the creation of new varieties in open economies. Using a dynamic two-country model incorporating nominal rigidities, international trade and firm entries we compare an independent monetary policy regime to a monetary union regime. We find that a common monetary policy defined by a nominal interest rate rule reactive to inflation increases extensive margin of trade volatility. Simulations based on business cycle frequencies indicate that on average this increase reaches 3%. Although monetary policy interdependence is found to be a key ingredient in generating this effect, we stress that those parameters affecting international trade structures are crucial in determining its magnitude.

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File URL: http://gredi.recherche.usherbrooke.ca/wpapers/GREDI-0809.pdf
File Function: First version, 2008
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Bibliographic Info

Paper provided by Departement d'Economique de la Faculte d'administration à l'Universite de Sherbrooke in its series Cahiers de recherche with number 08-09.

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Length: 18 pages
Date of creation: 2008
Date of revision:
Handle: RePEc:shr:wpaper:08-09

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Keywords: Extensive Margin; Variety Effect; Monetary Union; Monetary Policy;

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  1. David Hummels & Peter J. Klenow, 2005. "The Variety and Quality of a Nation's Exports," American Economic Review, American Economic Association, vol. 95(3), pages 704-723, June.
  2. Matthew B. Canzoneri & Robert E. Cumby & Behzad T. Diba, 2004. "The Cost of Nominal Inertia in NNS Models," NBER Working Papers 10889, National Bureau of Economic Research, Inc.
  3. Rotemberg, Julio J., 1996. "Prices, output, and hours: An empirical analysis based on a sticky price model," Journal of Monetary Economics, Elsevier, vol. 37(3), pages 505-533, June.
  4. Corsetti, Giancarlo & Martin, Philippe & Pesenti, Paolo, 2007. "Productivity, terms of trade and the `home market effect'," Journal of International Economics, Elsevier, vol. 73(1), pages 99-127, September.
  5. Christian Broda & David W. Weinstein, 2004. "Variety Growth and World Welfare," American Economic Review, American Economic Association, vol. 94(2), pages 139-144, May.
  6. Antoine Berthou & Lionel Fontagné, 2008. "The Euro and the Intensive and Extensive Margins of Trade: Evidence from French Firm Level Data," Working Papers 2008-06, CEPII research center.
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