When to Align and When to Contract: Technology Shocks, Optimal Policies, and Exchange Rate Regimes

Hyeongwoo Kim () and Shuwei Zhang

No auwp2026-05, Auburn Economics Working Paper Series from Department of Economics, Auburn University

Abstract: This paper characterizes optimal monetary policy responses to technology shocks in a two-country model with sticky prices, local currency pricing, and international technology diffusion. We show that technology shocks originating in the tradable sector, regardless of their country of origin, elicit symmetric and closely coordinated monetary policy responses across countries, providing a rationale for a fixed exchange rate regime. By contrast, technology shocks originating in the nontradable sector generate asymmetric policy responses and depreciate the source country's currency, supporting the case for exchange rate flexibility. We further show that the international transmission of technology shocks amplifies real sector dynamics through news effects, prompting central banks to adopt contractionary policies, a result that stands in sharp contrast to the prior literature.

Keywords: Exchange Rate Regimes; Interest Rate Rules; Local Currency Pricing; Sticky Price; Technology Diffusion (search for similar items in EconPapers)
JEL-codes: E52 F31 F41 O0 (search for similar items in EconPapers)
Date: 2026-04
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mon
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Related works:
Working Paper: When to Align and When to Contract: Technology Shocks, Optimal Policies, and Exchange Rate Regimes (2026)
Working Paper: When to Align and When to Contract: Technology Shocks, Optimal Policies, and Exchange Rate Regimes (2025)
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