Monetary Policy and Trade Globalization

Dudley Cooke
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Dudley Cooke: Trinity College Dublin ,Hong Kong Institute for Monetary Research

No 42010, Working Papers from Hong Kong Institute for Monetary Research

Abstract: I develop a two country general equilibrium model with heterogeneous price-setting firms to understand how shocks to monetary policy and aggregate labor productivity impact trade integration, which I capture through the (inverse) average productivity of exporting firms. A contractionary domestic monetary policy shock raises the average productivity of domestic exporting firms but lowers the average productivity of foreign exporting firms. The magnitude of these changes is greater when governments target domestic price inflation as opposed to consumer price inflation. A positive shock to domestic labor productivity generates positive - although quantitatively small - changes in the average productivity of all exporting firms when consumer price inflation is targeted. When domestic price inflation is targeted, the same shock causes a fall in the average productivity of domestic exporting firms, and a far larger rise in the productivity of foreign exporting firms.

Keywords: Monetary Policy; Heterogeneous Firms; Trade Globalization (search for similar items in EconPapers)
JEL-codes: E31 E52 F41 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2010-02
New Economics Papers: this item is included in nep-cba, nep-int, nep-mac, nep-mon and nep-opm
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