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Can trade openness affect the monetary transmission mechanism?

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  • Wen Zhang

Abstract

This paper explores how trade openness influences the monetary transmission mechanism. The theoretical analysis develops an open economy New Keynesian model that features one‐way offshoring from an advanced economy to a less developed one. The model suggests that greater openness to regular trade or to offshoring reduces the effect of monetary policy on domestic economies, although these two influences affect the monetary transmission mechanism via different channels. The empirical section estimates an interacted‐panel VAR model with U.S. industry data and confirms that greater exposure to regular trade or to offshoring significantly reduces the effect of monetary policy.

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  • Wen Zhang, 2020. "Can trade openness affect the monetary transmission mechanism?," Review of International Economics, Wiley Blackwell, vol. 28(2), pages 341-364, May.
    • Handle: RePEc:bla:reviec:v:28:y:2020:i:2:p:341-364
    DOI: 10.1111/roie.12453
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