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International transmission effects of monetary policy shocks: can asymmetric price setting explain the stylized facts?

  • Caroline Schmidt

    (Swiss Institute for Business Cycle Research, Switzerland)

How does an unexpected domestic monetary expansion affect the foreign economy? Does it induce an increase or a decline in foreign production? In the traditional two-country Mundell-Fleming model, monetary policy reveals 'beggar-thy-neighbour' effects. Yet, empirical evidence from VARs indicates that US monetary policy has positive international transmission effects on both foreign (non-US G-7) output and aggregate demand. In this paper, I show that a two-country dynamic general equilibrium model with sticky prices can account for these 'stylized facts' if we introduce international asymmetries in the price-setting behaviour of firms insofar as home (US) firms set export prices in their own currency only (producer-currency pricing), whereas producers in the rest of the world price their exports to the US in the local currency of the export market (local-currency pricing). Copyright © 2006 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/ijfe.293
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Article provided by John Wiley & Sons, Ltd. in its journal International Journal of Finance & Economics.

Volume (Year): 11 (2006)
Issue (Month): 3 ()
Pages: 205-218

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Handle: RePEc:ijf:ijfiec:v:11:y:2006:i:3:p:205-218
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