Capital Mobility, Consumption Substitutability and the Effects of Monetary Policy in Open Economies

Christian Pierdzioch

German Economic Review, 2005, vol. 6, issue 1, 79-94

Abstract: I use a dynamic general equilibrium two-country optimizing model to analyze the implications of international capital mobility for the short-run effects of monetary policy in an open economy. The model implies that the substitutability of goods produced in different countries plays a central role for the impact of changes in the degree of international capital mobility on the effects of monetary policy. Paralleling the results of the traditional Mundell-Fleming model, a higher degree of international capital mobility magnifies the short-run output effects of monetary policy only if the Marshall-Lerner condition, which is linked to the cross-country substitutability of goods, holds.

Keywords: Monetary policy; capital mobility (search for similar items in EconPapers)
Date: 2005
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DOI: 10.1111/j.1465-6485.2005.00122.x

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