U.S.-Europe Economic Interdependence and Policy Transmission

No 470, Boston College Working Papers in Economics from Boston College Department of Economics

Abstract: This paper proposes a microfounded general equilibrium model of the U.S. and European economies suitable for analyzing the transmission of monetary and fiscal policy shocks between the U.S. and Europe. The focus is on understanding the determinants of transatlantic economic interdependence. A positive analysis of the consequences of policy changes in the U.S. and Europe is made and results about the transmission of such shocks are obtained. In the model, consumer preferences in the U.S. and Europe are biased in favor of goods produced in the continent where agents reside. Hence, PPP does not hold across the Atlantic, except in steady state. However, this is not sufficient to cause overshooting of the dollar exchange rate following policy shocks. U.S. current-account surplus can be achieved by means of a monetary expansion, a persistent increase in government spending, and/or higher long-run distortionary taxes relative to Europe.

Keywords: Europe; Macroeconomic interdependence; Monetary policy; Fiscal policy; United States (search for similar items in EconPapers)
JEL-codes: F3 F41 (search for similar items in EconPapers)
Date: Written 2000-01-10
View list of references View citations in EconPapers

Downloads: (external link)
http://fmwww.bc.edu/EC-P/WP470.pdf main text (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Access Statistics for this paper

More papers in Boston College Working Papers in Economics from Boston College Department of Economics
Address: Boston College, 140 Commonwealth Avenue, Chestnut Hill MA 02467 USA
Contact information at EDIRC.
Series data maintained by Christopher F Baum ().