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

  • Christian Pierdzioch

I use a dynamic general equilibrium two-country optimizing model to analyze the implications of international capital mobility for the short-run effects of monetary policy in an open economy. The model implies that the substitutability of goods produced in different countries plays a central role for the impact of changes in the degree of international capital mobility on the effects of monetary policy. Paralleling the results of the traditional Mundell-Fleming model, a higher degree of international capital mobility magnifies the short-run output effects of monetary policy only if the Marshall-Lerner condition, which is linked to the cross-country substitutability of goods, holds. Copyright Verein für Socialpolitik and Blackwell Publishing Ltd. 2005.

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Article provided by Verein für Socialpolitik in its journal German Economic Review.

Volume (Year): 6 (2005)
Issue (Month): 1 (02)
Pages: 79-94

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Handle: RePEc:bla:germec:v:6:y:2005:i:1:p:79-94
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  1. Steinsson, Jon, 2003. "Optimal monetary policy in an economy with inflation persistence," Journal of Monetary Economics, Elsevier, vol. 50(7), pages 1425-1456, October.
  2. Benigno, Pierpaolo, 2001. "Price Stability with Imperfect Financial Integration," CEPR Discussion Papers 2854, C.E.P.R. Discussion Papers.
  3. Obstfeld, Maurice & Rogoff, Kenneth S., 1995. "Exchange Rate Dynamics Redux," Scholarly Articles 12491026, Harvard University Department of Economics.
  4. Klein, Paul, 2000. "Using the generalized Schur form to solve a multivariate linear rational expectations model," Journal of Economic Dynamics and Control, Elsevier, vol. 24(10), pages 1405-1423, September.
  5. Benigno, Gianluca & Benigno, Pierpaolo, 2001. "Monetary Policy Rules and the Exchange Rate," CEPR Discussion Papers 2807, C.E.P.R. Discussion Papers.
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