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Does trade integration alter monetary policy transmission?

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  • Cwik, Tobias J.
  • Müller, Gernot J.
  • Wolters, Maik H.

Abstract

This paper explores the role of trade integrationor opennessfor monetary policy transmission in a medium-scale New Keynesian model. Allowing for strategic complementarities in price-setting, we highlight a new dimension of the exchange rate channel by which monetary policy directly impacts domestic inflation. Although the strength of this effect increases with economic openness, it also requires that import prices respond to exchange rate changes. In this case domestic producers find it optimal to adjust their prices to exchange rate changes which alter the domestic currency price of their foreign competitors. We pin down key parameters of the model by matching impulse responses obtained from a vector autoregression on U.S. time series relative to an aggregate of industrialized countries. While we find evidence for strong complementarities, exchange rate pass-through is limited. Openness has therefore little bearing on monetary transmission in the estimated model.

Suggested Citation

  • Cwik, Tobias J. & Müller, Gernot J. & Wolters, Maik H., 2008. "Does trade integration alter monetary policy transmission?," CFS Working Paper Series 2008/29, Center for Financial Studies (CFS).
  • Handle: RePEc:zbw:cfswop:200829
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    1. Ekpo, Akpan H. & Effiong, Ekpeno L., 2017. "Openness and the Effects of Monetary Policy in Africa," MPRA Paper 80847, University Library of Munich, Germany.
    2. Cherkas N., Atamanchuk Z., 2015. "Assessing macroeconomic effects of monetary policy in Ukraine," Economy and Forecasting, Valeriy Heyets, issue 3, pages 123-134.
    3. Bruno Coric & Lena Malesevic Perovic & Vladimir Simic, 2015. "A Cross-Country Analysis of Monetary Policy Effects on Prices," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 65(5), pages 377-390, October.
    4. Cogan, John F. & Taylor, John B. & Wieland, Volker & Wolters, Maik H., 2013. "Fiscal consolidation strategy," Journal of Economic Dynamics and Control, Elsevier, vol. 37(2), pages 404-421.
    5. Potjagailo, Galina, 2017. "Spillover effects from Euro area monetary policy across Europe: A factor-augmented VAR approach," Journal of International Money and Finance, Elsevier, vol. 72(C), pages 127-147.
    6. Fabio Verona & Maik Wolters, 2014. "Sticky Information Models in Dynare," Computational Economics, Springer;Society for Computational Economics, vol. 43(3), pages 357-370, March.
    7. Simone Meier, 2013. "Financial Globalization and Monetary Transmission," Working Papers 2013-03, Swiss National Bank.
    8. Bruno Ćorić & Lena Malešević Perović & Vladimir Šimić, 2016. "Openness and the Strength of Monetary Transmission: International Evidence," Acta Oeconomica, Akadémiai Kiadó, Hungary, vol. 66(4), pages 639-659, December.
    9. Georgiadis, Georgios & Mehl, Arnaud, 2015. "Trilemma, not dilemma: financial globalisation and Monetary policy effectiveness," Globalization and Monetary Policy Institute Working Paper 222, Federal Reserve Bank of Dallas.
    10. Yoshiyuki Fukuda & Yuki Kimura & Nao Sudo & Hiroshi Ugai, 2013. "Cross-country Transmission Effect of the U.S. Monetary Shock under Global Integration," Bank of Japan Working Paper Series 13-E-16, Bank of Japan.
    11. Georgiadis, Georgios & Mehl, Arnaud, 2016. "Financial globalisation and monetary policy effectiveness," Journal of International Economics, Elsevier, vol. 103(C), pages 200-212.
    12. Alpaslan AKÇORAOĞLU, 2012. "Yeni Açık Ekonomi Makroiktisat Teorisi ve Para Politikasının Uluslararası Boyutları," Ekonomik Yaklasim, Ekonomik Yaklasim Association, vol. 23(85), pages 57-82.

    More about this item

    Keywords

    Monetary Policy Transmission; Open Economy; Trade Integration; Exchange Rate Channel; Strategic Complementarity; Exchange Rate Pass-Through;

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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