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

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  • Christian Pierdzioch

Abstract

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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  • Christian Pierdzioch, 2005. "Capital Mobility, Consumption Substitutability and the Effects of Monetary Policy in Open Economies," German Economic Review, Verein für Socialpolitik, vol. 6(1), pages 79-94, February.
  • Handle: RePEc:bla:germec:v:6:y:2005:i:1:p:79-94
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    References listed on IDEAS

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    1. Obstfeld, Maurice & Rogoff, Kenneth, 1995. "Exchange Rate Dynamics Redux," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 624-660, June.
    2. 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.
    3. McCallum, Bennett T & Nelson, Edward, 2000. "Monetary Policy for an Open Economy: An Alternative Framework with Optimizing Agents and Sticky Prices," Oxford Review of Economic Policy, Oxford University Press, vol. 16(4), pages 74-91, Winter.
    4. Pierpaolo Benigno, 2009. "Price Stability with Imperfect Financial Integration," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(s1), pages 121-149, February.
    5. Benigno, Gianluca & Benigno, Pierpaolo, 2001. "Monetary Policy Rules and the Exchange Rate," CEPR Discussion Papers 2807, C.E.P.R. Discussion Papers.
    6. Steinsson, Jon, 2003. "Optimal monetary policy in an economy with inflation persistence," Journal of Monetary Economics, Elsevier, vol. 50(7), pages 1425-1456, October.
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    Cited by:

    1. 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.
    2. Sastre, Luis, 2012. "Simultaneity between export and import flows and the Marshall–Lerner condition," Economic Modelling, Elsevier, vol. 29(3), pages 879-883.
    3. Ganelli, Giovanni & Tervala, Juha, 2011. "International transmission of environmental policy: A New Keynesian perspective," Ecological Economics, Elsevier, vol. 70(11), pages 2070-2082, September.

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