Project without external funding

Geldpolitik in einem Zwei-Länder-Modell mit rigiden Preisen

Project Details
Project duration: 05/200007/2006

This paper introduces a home-product bias into the two-country intertemporal monetary model of Obstfeld and Rogoff. Such a bias serves as an external source of economic distortion, namely, monopoly power of a country in trade. We use the framework to re-examine the welfare effects of expansionary monetary policy. The main results are: Firstly, when preferences are biased, a monetary expansion does not benefit both countries to the same extent. Secondly, due to deteriorating terms of trade, the benefits from a domestic monetary expansion accrue primarily to foreigners. Thirdly, because of more expensive imports the purchasing power of domestic consumers declines implying that a monetary expansion can have an adverse beggar-thyself effect. The paper shows how the sign of the welfare effect depends on the home bias, the substitutability of home and foreign goods and the degree of monopolistic distortions on the labour and goods markets.

Last updated on 2017-11-07 at 14:50