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International Trade Fluctuations and Monetary Policy

Author

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  • Ana Maria Santacreu

    (Federal Reserve Bank of Saint Louis and)

  • Fernando Leibovici

    (York University)

Abstract

This paper studies the role of trade openness for the design of monetary policy. We extend a standard small open economy model of monetary policy to capture cyclical fluctuations of international trade flows, and parameterize it to match key features of the data. We find that accounting for trade fluctuations matters for monetary policy: when the monetary authority follows a Taylor rule, inflation and the output gap are more volatile. Moreover, we find that the volatility of these variables is significantly higher when the central bank follows the optimal policy based on a model that cannot account for international trade fluctuations.

Suggested Citation

  • Ana Maria Santacreu & Fernando Leibovici, 2016. "International Trade Fluctuations and Monetary Policy," 2016 Meeting Papers 367, Society for Economic Dynamics.
  • Handle: RePEc:red:sed016:367
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    File URL: https://economicdynamics.org/meetpapers/2016/paper_367.pdf
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    References listed on IDEAS

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    1. Leibovici, Fernando & Waugh, Michael E., 2019. "International trade and intertemporal substitution," Journal of International Economics, Elsevier, vol. 117(C), pages 158-174.
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    1. repec:rfe:zbefri:v:37:y:2019:i:1:p:55-75 is not listed on IDEAS

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