International Transmission Effects of Monetary Policy Shocks: Can Asymmetric Price Setting Explain the Stylized Facts?

Caroline Schmidt

No 05-102, KOF Working papers from KOF Swiss Economic Institute, ETH Zurich

Abstract: 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 has "beggar-thy-neighbor" effects. Yet, empirical evidence from VARs indicates that U.S. monetary policy has positive international transmission effects on both foreign (non-U.S. G-7) output and aggregate demand. In this paper, I will show that a two-country dynamic general equilibrium model with sticky prices can account for these "stylized facts" if we allow for international asymmetries in the price-setting behavior of firms. If U.S. 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 U.S. in the local currency of the export market (local-currency pricing), a U.S. monetary expansion is found to increase output and aggregate demand abroad.

Keywords: Local-currency pricing; Producer-currency pricing; New Open Economy Macroeconomics; International transmission effects of monetary policy (search for similar items in EconPapers)
Pages: 51 pages
Date: 2005-03
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (1)

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http://dx.doi.org/10.3929/ethz-a-004957474 (application/pdf)

Related works:
Journal Article: International transmission effects of monetary policy shocks: can asymmetric price setting explain the stylized facts? (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:kof:wpskof:05-102

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