The Effectiveness of Monetary and Fiscal Policy with Different Degrees of Goods and Financial Market Integration

Ozge Senay ()

Discussion Papers from Department of Economics, University of York

Abstract: Given the importance of economic integration and the concern for macroeconomic stabilisation, it is important to understand how increasing integration alters the effectiveness of government policy tools. This paper aims to determine how increasing goods and financial market integration changes the effectiveness of fiscal and monetary policy. Expansionary monetary and fiscal policies are analysed under different degrees of goods and financial market integration in a dynamic general equilibrium framework. Imperfect goods market integration is represented by the presence of pricing-to-market behaviour by firms and imperfect financial market integration is represented by agents facing adjustment costs to foreign asset stock changes. Simulations show that the effectiveness of fiscal and monetary policy change significantly depending on the presence of incompletely integrated goods and/or financial markets. While financial market integration increases the effectiveness of monetary policy, it diminishes the effectiveness of fiscal policy. Goods market integration increases the effectiveness of both monetary and fiscal policy.

Keywords: Policy effectiveness; pricing-to-market; goods market integration; financial market integration (search for similar items in EconPapers)
JEL-codes: F31 F36 F41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mon
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