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Vertical International Trade as a Monetary Transmission Mechanism in an Open Economy

  • Kevin X. D. Huang

    (Utah State University)

  • Zheng Liu

    (Clark University)

This paper analyzes a two-country general equilibrium model with multiple stages of production and sticky prices. Working through the cross-country input-output relations and endogenous price stickiness, the model generates the observed patterns in international aggregate comovements following monetary shocks. In particular, both output and consumption comove across countries, and output correlation is larger than consumption correlation, as in the data. The model also generates persistent fluctuations of real exchange rates. Thus, vertical international trade plays an important role in propagating monetary shocks in an open economy.

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Paper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 1533.

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Date of creation: 01 Aug 2000
Date of revision:
Handle: RePEc:ecm:wc2000:1533
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  1. AMBLER, Steve & CARDIA, Emanuela & ZIMMERMANN, Christian, 2000. "International Transmission of the Business Cycle in a Multi-Sector Model," Cahiers de recherche 2000-06, Universite de Montreal, Departement de sciences economiques.
  2. David K. Backus & Patrick J. Kehoe & Finn E. Kydland, 1991. "International real business cycles," Staff Report 146, Federal Reserve Bank of Minneapolis.
  3. Hummels, David & Ishii, Jun & Yi, Kei-Mu, 2001. "The nature and growth of vertical specialization in world trade," Journal of International Economics, Elsevier, vol. 54(1), pages 75-96, June.
  4. Blanchard, Olivier Jean & Kiyotaki, Nobuhiro, 1987. "Monopolistic Competition and the Effects of Aggregate Demand," American Economic Review, American Economic Association, vol. 77(4), pages 647-66, September.
  5. 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.
  6. Beaudry, Paul & Devereux, Michael B., 1995. "Money and the real exchange rate with sticky prices and increasing returns," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 43(1), pages 55-101, December.
  7. Kevin X. D. Huang & Zheng Liu, 1999. "Chain of Production as a Monetary Propagation Mechanism," Cahiers de recherche CREFE / CREFE Working Papers 106, CREFE, Université du Québec à Montréal.
  8. Lucas, Robert E, Jr & Stokey, Nancy L, 1987. "Money and Interest in a Cash-in-Advance Economy," Econometrica, Econometric Society, vol. 55(3), pages 491-513, May.
  9. Baxter, Marianne, 1995. "International trade and business cycles," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 35, pages 1801-1864 Elsevier.
  10. Marianne Baxter, 1995. "International Trade and Business Cycles," NBER Working Papers 5025, National Bureau of Economic Research, Inc.
  11. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December.
  12. Paul R. Bergin & Robert C. Feenstra, . "Pricing To Market, Staggered Contracts, And Real Exchange Rate Persistence," Department of Economics 99-01, California Davis - Department of Economics.
  13. Robert C. Feenstra, 1998. "Integration of Trade and Disintegration of Production in the Global Economy," Journal of Economic Perspectives, American Economic Association, vol. 12(4), pages 31-50, Fall.
  14. Michael A. Kouparitsas, 1996. "North-South business cycles," Working Paper Series, Macroeconomic Issues WP-96-9, Federal Reserve Bank of Chicago.
  15. Olivier J. Blanchard, 1982. "Price Asynchronization and Price Level Inertia," NBER Working Papers 0900, National Bureau of Economic Research, Inc.
  16. repec:nbr:nberre:0126 is not listed on IDEAS
  17. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February.
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