The Extensive Margin of Trade under Alternative Monetary Policy Regimes

Stéphane Auray, Aurélien Eyquem and Poutineau, Jean-Christophe
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Poutineau, Jean-Christophe: CREM, UMR 6211, Université de Rennes 1 and Ecole Normale Supérieure de Cachan, France

Cahiers de recherche from Departement d'Economique de la Faculte d'administration à l'Universite de Sherbrooke

Abstract: This paper investigates the impact of alternative monetary policy regimes on the creation of new varieties in open economies. Using a dynamic two-country model incorporating nominal rigidities, international trade and firm entries we compare an independent monetary policy regime to a monetary union regime. We find that a common monetary policy defined by a nominal interest rate rule reactive to inflation increases extensive margin of trade volatility. Simulations based on business cycle frequencies indicate that on average this increase reaches 3%. Although monetary policy interdependence is found to be a key ingredient in generating this effect, we stress that those parameters affecting international trade structures are crucial in determining its magnitude.

Keywords: Extensive Margin; Variety Effect; Monetary Union; Monetary Policy (search for similar items in EconPapers)
JEL-codes: E51 E58 F36 F41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-opm
Date: 2008
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Persistent link: http://EconPapers.repec.org/RePEc:shr:wpaper:08-09

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