Excess Capacity, Monopolistic Competition, and International Transmission of Monetary Disturbances
Lars Svensson and
Sweder van Wijnbergen
Economic Journal, 1989, vol. 99, issue 397, 785-805
Abstract:
A stochastic, two-country, neoclassical, rational-expectations model with sticky prices--optimally set by monopolistically competitive firms--and possible excess capacity is developed to examine international spillover effects on output of monetary disturbances. The Mundell-Fleming model predicts that monetary expansion at home leads to recession abroad. In contrast, the main result is that spillover effects of monetary policy may be either positive or negative, depending upon whether the intertemporal elasticity of substitution in consumption exceeds the intratemporal elasticity of substitution. The model, in addition, is used to determine nominal and real interest rates, exchange rates, and other asset prices. Copyright 1989 by Royal Economic Society.
Date: 1989
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