International transmission effects of monetary policy shocks: can asymmetric price setting explain the stylized facts?
✍ Scribed by Caroline Schmidt
- Publisher
- John Wiley and Sons
- Year
- 2006
- Tongue
- English
- Weight
- 174 KB
- Volume
- 11
- Category
- Article
- ISSN
- 1076-9307
- DOI
- 10.1002/ijfe.293
No coin nor oath required. For personal study only.
✦ Synopsis
How does an unexpected domestic monetary expansion affect the foreign economy? Does it induce an increase or a decline in foreign production? In the traditional two-country Mundell-Fleming model, monetary policy reveals 'beggarthy-neighbour' effects. Yet, empirical evidence from VARs indicates that US monetary policy has positive international transmission effects on both foreign (non-US G-7) output and aggregate demand. In this paper, I show that a twocountry dynamic general equilibrium model with sticky prices can account for these 'stylized facts' if we introduce international asymmetries in the price-setting behaviour of firms insofar as home (US) firms set export prices in their own currency only (producer-currency pricing), whereas producers in the rest of the world price their exports to the US in the local currency of the export market (local-currency pricing).