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The international transmission of monetary policy in a dollar pricing model

  • Tervala, Juha

    ()

    (University of Helsinki and HECER)

This paper analyses the international transmission of monetary policy in a case where all export prices are set in US dollars. ‘Dollar pricing’ implies that the international effects of US monetary shocks are different to those of European shocks because of asymmetric exchange rate pass-through to import prices. A dollar pricing model can explain the observed asymmetry in the transmission of monetary policy: US monetary policy affects US output more than European monetary policy affects European output. I also show that the dollar pricing model reintroduces the current account as an important channel through which monetary policy affects welfare in the short run. The paper concludes that under dollar pricing monetary expansion is a beggar-thy-neighbour policy.

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File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/0729netti.pdf
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Paper provided by Bank of Finland in its series Research Discussion Papers with number 29/2007.

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Length: 36 pages
Date of creation: 16 Dec 2007
Date of revision:
Publication status: Published as Tervala, Juha, 'The international transmission of monetary policy in a dollar pricing model' in Open Economies Review, 2010, pages 629-654.
Handle: RePEc:hhs:bofrdp:2007_029
Contact details of provider: Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.suomenpankki.fi/en/

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  12. Betts, Caroline & Devereux, Michael B., 1996. "The exchange rate in a model of pricing-to-market," European Economic Review, Elsevier, vol. 40(3-5), pages 1007-1021, April.
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  17. Kim, Soyoung, 2001. "International transmission of U.S. monetary policy shocks: Evidence from VAR's," Journal of Monetary Economics, Elsevier, vol. 48(2), pages 339-372, October.
  18. Giancarlo Corsetti & Paolo Pesenti, 2005. "The simple geometry of transmission and stabilization in closed and open economies," Economics Working Papers ECO2005/26, European University Institute.
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  24. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December.
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  26. Betts, Caroline & Devereux, Michael B., 2000. "Erratum to "Exchange rate dynamics in a model of pricing-to-market": [Journal of International Economics 50 (2000) 214-244]," Journal of International Economics, Elsevier, vol. 52(1), pages 207-208, October.
  27. Ignazio Angeloni & Anil K. Kashyap & Benoît Mojon & Daniele Terlizzese, 2003. "The output composition puzzle: a difference in the monetary transmission mechanism in the euro area and United States," Proceedings, Federal Reserve Bank of Cleveland, pages 1265-1317.
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