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Pricing behavior and the role of trade openness in the transmission of monetary shocks

Laura Povoledo ()

Journal of Macroeconomics, 2018, vol. 57, issue C, 231-247

Abstract: The empirical evidence on the role of trade openness in the monetary transmission is not conclusive: some studies find that it increases the sensitivity of output to monetary shocks, others find that it does not. Using a New Keynesian open economy model, I show that the role of trade openness in the transmission of monetary shocks can be reversed completely by the degree of exchange-rate pass-through into import prices. If the pass-through is complete, traded output increases more than nontraded output after a positive monetary shock, if the pass-through is zero, traded output increases less. Moreover, ignoring sectoral heterogeneity in price rigidity leads to an incorrect assessment of the role of trade openness in the transmission of monetary shocks.

Keywords: Monetary transmission; Traded and nontraded output; Exchange rate pass-through; Openness; Sectoral disaggregation (search for similar items in EconPapers)
JEL-codes: E32 F41 (search for similar items in EconPapers)
Date: 2018
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Working Paper: Pricing behaviour and the role of trade openness in the transmission of monetary shocks (2016) Downloads
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