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International Welfare Effects of Monetary Policy

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  • Juha Tervala

    ()
    (Aboa Centre for Economics and University of Turku)

Abstract

In this paper, I examine the international welfare effects of monetary policy. I develop a New Keynesian two-country model, where central banks in both countries follow the Taylor rule. I show that a decrease in the domestic interest rate, under producer currency pricing, is a beggar-thyself policy that reduces domestic welfare and increases foreign welfare in the short term, regardless of whether the cross-country substitutability is high or low. In the medium term, it is a beggar-thy-neighbour (beggar-thyself) policy, if the Marshall-Lerner condition is satisfied (violated). Under local currency pricing, a decrease in the domestic interest rate is a beggar-thy-neighbour policy in the short term, but a beggarthyself policy in the medium term. Both under producer and local currency pricing, a monetary expansion increases world welfare in the short term, but reduces it in the medium term.

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Bibliographic Info

Paper provided by Aboa Centre for Economics in its series Discussion Papers with number 66.

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Length: 34
Date of creation: Apr 2011
Date of revision:
Handle: RePEc:tkk:dpaper:dp66

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Keywords: Open economy macroeconomics; monetary policy; beggar-thyself; beggar-thy-neighbour; Taylor rule; welfare analysis;

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References

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  17. Engler, Philipp & Tervala, Juha, 2011. "Beggar-thyself or beggar-thy-neighbour? The welfare effects of monetary policy," Economic Modelling, Elsevier, vol. 28(4), pages 2034-2040, July.
  18. Richard Clarida & Jordi Galí & Mark Gertler, 1997. "Monetary policy rules and macroeconomic stability: Evidence and some theory," Economics Working Papers 350, Department of Economics and Business, Universitat Pompeu Fabra, revised May 1999.
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Cited by:
  1. Tervala, Juha, 2014. "China, the Dollar Peg and U.S. Monetary Policy," MPRA Paper 53223, University Library of Munich, Germany.
  2. Tervala, Juha, 2013. "Learning by devaluating: A supply-side effect of competitive devaluation," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 275-290.

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