International transmission effects of monetary policy shocks: can asymmetric price setting explain the stylized facts?

Caroline Schmidt

International Journal of Finance & Economics, 2006, vol. 11, issue 3, 205-218

Abstract: How does an unexpected domestic monetary expansion affect the foreign economy? Does it induce an increase or a decline in foreign production? In the traditional two-country Mundell-Fleming model, monetary policy reveals 'beggar-thy-neighbour' effects. Yet, empirical evidence from VARs indicates that US monetary policy has positive international transmission effects on both foreign (non-US G-7) output and aggregate demand. In this paper, I show that a two-country dynamic general equilibrium model with sticky prices can account for these 'stylized facts' if we introduce international asymmetries in the price-setting behaviour of firms insofar as home (US) firms set export prices in their own currency only (producer-currency pricing), whereas producers in the rest of the world price their exports to the US in the local currency of the export market (local-currency pricing). Copyright © 2006 John Wiley & Sons, Ltd.

Date: 2006
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Working Paper: International Transmission Effects of Monetary Policy Shocks: Can Asymmetric Price Setting Explain the Stylized Facts? (2005)
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DOI: 10.1002/ijfe.293

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