 Exchange rates and monetary policy when tradable and nontradable goods are complementsInternational Review of Economics & Finance, 2024, vol. 89, issue PA, 297-309 Abstract: This paper examines the implications of complementarity between tradable and nontradable goods for exchange rates and monetary policy in a two-country general equilibrium model. In doing so, it revisits well-known findings in the New Open Economy Macroeconomics literature that exchange rates are proportional to relative national money supplies and that optimal monetary policies respond only to domestic shocks. These results depend on a number of simplifying assumptions, including a unitary elasticity of substitution between tradable and nontradable goods. When this assumption is replaced by a more-realistic one of complementarity, exchange rates depend on relative productivity in addition to money supplies when prices are flexible. When prices are sticky, complementarity amplifies the effect of changes in relative money supplies on the exchange rate and creates additional spillover effects from changes in the foreign money supply to domestic consumption. With complementarity, optimal monetary policies respond to external as well as internal shocks. Keywords: New open economy macroeconomics; Nontradable goods; Complementarity; Optimal monetary policy (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:89:y:2024:i:pa:p:297-309 DOI: 10.1016/j.iref.2023.07.058 Access Statistics for this article International Review of Economics & Finance is currently edited by H. Beladi and C. Chen More articles in International Review of Economics & Finance from Elsevier |
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