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On the efficiency of monetary and fiscal policy in open economies

Chan Wang and Heng-Fu Zou ()

Annals of Economics and Finance, 2013, vol. 14, issue 1, 179-206

Abstract: This paper investigates the effciency of monetary and fiscal policy in a two-country general equilibrium model with monopolistic competition and wage stickiness. When monopoly distortions are completely eliminated, we find that stochastic government spending can affect the efficiency of global monetary policy rules that replicate the real allocations under flexible wages under some conditions. When stochastic government spending is present, unlike Obstfeld and Rogoff (2000), we find that the monopoly distortions can also affect the efficiency of global monetary policy rules that replicate the real allocations under flexible wages when the same conditions as the above-mentioned are satisfied. The combination of proportional subsidy policies used to completely eliminate monopoly distortions and the monetary policy rules replicating the real allocations under flexible wages, contrary to Obstfeld and Rogoff (2000), can't achieve utility level under competitive equilibrium in our settings. Fiscal policy is found to be unable to replicate the real allocation under flexible wages.

Keywords: New open-economy macroeconomics; Effciency of global monetary policy rules; Stochastic government spending; Monopoly distortions (search for similar items in EconPapers)
JEL-codes: E52 E61 E62 E63 F33 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Working Paper: On the efficiency of monetary and fiscal policy in open economies (2012) Downloads
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