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On the efficiency of monetary and fiscal policy in open economies

Listed author(s):
  • Chan Wang

    (China Economics and Management Academy, Central University of Finance and Economics)

  • Heng-fu Zou

    (Institute for Advanced Study, Wuhan University
    Institute for Advanced Study, Shenzhen University)

This paper investigates the effciency of monetary and fiscal policy in a two-country general equilibrium model with monopolistic competition and wage stickiness. When monopoly distortions are completely eliminated, we find that stochastic government spending can affect the efficiency of global monetary policy rules that replicate the real allocations under flexible wages under some conditions. When stochastic government spending is present, unlike Obstfeld and Rogoff (2000), we find that the monopoly distortions can also affect the efficiency of global monetary policy rules that replicate the real allocations under flexible wages when the same conditions as the above-mentioned are satisfied. The combination of proportional subsidy policies used to completely eliminate monopoly distortions and the monetary policy rules replicating the real allocations under flexible wages, contrary to Obstfeld and Rogoff (2000), can't achieve utility level under competitive equilibrium in our settings. Fiscal policy is found to be unable to replicate the real allocation under flexible wages.

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File URL: http://down.aefweb.net/AefArticles/aef140109Wang.pdf
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Article provided by Society for AEF in its journal Annals of Economics and Finance.

Volume (Year): 14 (2013)
Issue (Month): 1 (May)
Pages: 179-206

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Handle: RePEc:cuf:journl:y:2013:v:14:i:1:wang:zou
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  4. Maurice Obstfeld & Kenneth Rogoff, 2002. "Global Implications of Self-Oriented National Monetary Rules," The Quarterly Journal of Economics, Oxford University Press, vol. 117(2), pages 503-535.
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  10. Obstfeld, Maurice & Rogoff, Kenneth, 2000. "New directions for stochastic open economy models," Journal of International Economics, Elsevier, vol. 50(1), pages 117-153, February.
  11. Tatiana Kirsanova & Mathan Satchi & David Vines & Simon Wren-Lewis, 2007. "Optimal Fiscal Policy Rules in a Monetary Union," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(7), pages 1759-1784, October.
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  13. Hau, Harald, 2000. "Exchange rate determination: The role of factor price rigidities and nontradeables," Journal of International Economics, Elsevier, vol. 50(2), pages 421-447, April.
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  23. V. V Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2002. "Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates?," Review of Economic Studies, Oxford University Press, vol. 69(3), pages 533-563.
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  25. Barro, Robert J, 1990. "Government Spending in a Simple Model of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 103-126, October.
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  28. Zou, Heng-Fu, 1993. "Dollarization and inflation in a two-country optimization model," Journal of International Money and Finance, Elsevier, vol. 12(2), pages 209-220, April.
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