International Trade Imbalance: The Amplification of Monetary Policy Effects through Financial Markets

Qiheng Han, Junqing Li and Jianbo Zhang

A chapter in Monetary Policy in the Context of the Financial Crisis: New Challenges and Lessons, 2015, vol. 24, pp 339-365 from Emerald Group Publishing Limited

Abstract: Based on an uncertainty model with an infinite horizon, this chapter analyzes how financial development and monetary policy in two countries can impact international trade and capital flows and influence individual behavior and welfare. Our study shows that differences in capital market development are the major contributing factors for trade imbalance and investment among countries. We also find that monetary policies are important factors affecting the trade balance, consumption, and investment. Countries with one-sided, pegging exchange rate policies tend to buy more bonds and enjoy larger trade surpluses. This effect is closely related to the level of capital market development: in these two countries, at higher stages of development, the effects of idiosyncratic monetary policy on imbalance are amplified.

Keywords: incomplete financial market; monetary policy combination; global imbalances; D52; F17; F34 (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:eme:isetez:s1571-038620150000024021

DOI: 10.1108/S1571-038620150000024021

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