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

Author

Listed:
  • Kevin X. D. Huang

    (Utah State University)

  • Zheng Liu

    (Clark University)

Abstract

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.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Kevin X. D. Huang & Zheng Liu, 2000. "Vertical International Trade as a Monetary Transmission Mechanism in an Open Economy," Econometric Society World Congress 2000 Contributed Papers 1533, Econometric Society.
  • Handle: RePEc:ecm:wc2000:1533
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    References listed on IDEAS

    as
    1. Ambler, Steve & Cardia, Emanuela & Zimmermann, Christian, 2002. "International transmission of the business cycle in a multi-sector model," European Economic Review, Elsevier, vol. 46(2), pages 273-300, February.
    2. Backus, David K & Kehoe, Patrick J & Kydland, Finn E, 1992. "International Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 745-775, August.
    3. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February.
    4. 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.
    5. 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.
    6. 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.
    7. 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.
    8. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-1176, December.
    9. 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.
    10. 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.
    11. Paul R. Bergin & Robert C. Feenstra, 2017. "Pricing-to-Market, Staggered Contracts, and Real Exchange Rate Persistence," World Scientific Book Chapters,in: International Macroeconomic Interdependence, chapter 6, pages 155-185 World Scientific Publishing Co. Pte. Ltd..
    12. 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.
    13. Blanchard, Olivier Jean & Kiyotaki, Nobuhiro, 1987. "Monopolistic Competition and the Effects of Aggregate Demand," American Economic Review, American Economic Association, vol. 77(4), pages 647-666, September.
    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.
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    Citations

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    Cited by:

    1. Kevin X. D. Huang & Zheng Liu, 2004. "Multiple stages of processing and the quantity anomaly in international business cycle models," Working Papers 04-8, Federal Reserve Bank of Philadelphia.
    2. Huang, Kevin X.D. & Liu, Zheng, 2006. "Sellers' local currency pricing or buyers' local currency pricing: does it matter for international welfare analysis?," Journal of Economic Dynamics and Control, Elsevier, vol. 30(7), pages 1183-1213, July.
    3. Huang, Kevin X.D. & Liu, Zheng, 2007. "Business cycles with staggered prices and international trade in intermediate inputs," Journal of Monetary Economics, Elsevier, vol. 54(4), pages 1271-1289, May.
    4. Kevin X. D. Huang & Zheng Liu, 2005. "Vertical production and trade interdependence and welfare," Working Papers 05-15, Federal Reserve Bank of Philadelphia.

    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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