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International welfare effects of monetary policy

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  • Tervala, Juha

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 beggar-thyself 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.

Suggested Citation

  • Tervala, Juha, 2012. "International welfare effects of monetary policy," Journal of International Money and Finance, Elsevier, vol. 31(2), pages 356-376.
  • Handle: RePEc:eee:jimfin:v:31:y:2012:i:2:p:356-376
    DOI: 10.1016/j.jimonfin.2011.11.019
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    Cited by:

    1. Luis Sastre, 2016. "Exchange Rate, Cross Elasticities Between Exports and Imports and Current Account Sustainability: The Spanish Case," Review of Economics & Finance, Better Advances Press, Canada, vol. 6, pages 32-46, November.
    2. Ganelli, Giovanni & Tervala, Juha, 2015. "Value of WTO trade agreements in a New Keynesian model," Journal of Macroeconomics, Elsevier, vol. 45(C), pages 347-362.
    3. 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.
    4. Tervala, Juha, 2014. "China, the Dollar Peg and U.S. Monetary Policy," MPRA Paper 53223, University Library of Munich, Germany.
    5. Sheng Wang & Rufei Guo, 2016. "Asymmetric Exchange Rate Pass-through and Monetary Policy in Open Economy," Annals of Economics and Finance, Society for AEF, vol. 17(1), pages 33-53, May.

    More about this item

    Keywords

    Open economy macroeconomics; Monetary policy; Beggar-thyself; Beggar-thy-neighbour; Taylor rule; Welfare analysis;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F30 - International Economics - - International Finance - - - General
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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