International Welfare Effects of Monetary Policy

Juha Tervala

No 66, Discussion Papers from Aboa Centre for Economics

Abstract: In this paper, I examine the international welfare effects of monetary policy. I develop a New Keynesian two-country model, where central banks in both countries follow the Taylor rule. I show that a decrease in the domestic interest rate, under producer currency pricing, is a beggar-thyself policy that reduces domestic welfare and increases foreign welfare in the short term, regardless of whether the cross-country substitutability is high or low. In the medium term, it is a beggar-thy-neighbour (beggar-thyself) policy, if the Marshall-Lerner condition is satisfied (violated). Under local currency pricing, a decrease in the domestic interest rate is a beggar-thy-neighbour policy in the short term, but a beggarthyself policy in the medium term. Both under producer and local currency pricing, a monetary expansion increases world welfare in the short term, but reduces it in the medium term.

Keywords: Open economy macroeconomics; monetary policy; beggar-thyself; beggar-thy-neighbour; Taylor rule; welfare analysis (search for similar items in EconPapers)
JEL-codes: E32 E52 F30 F41 F44 (search for similar items in EconPapers)
Pages: 34
Date: 2011-04
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-opm
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Citations: View citations in EconPapers (2)

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Journal Article: International welfare effects of monetary policy (2012)
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