Monetary Policy and Investment Dynamics in Interdependent Economies

Jurg Niehans

Journal of Money, Credit and Banking, 1987, vol. 19, issue 1, 33-45

Abstract: A dynamic two-country model is used to determine the adjustment pat hs of prices, interest rates, exchange rates, and capital flows aftera change i n monetary policy. The principal controlling factor is thereaction of investmen t to capital goods prices (Tobin's q). Monetaryexpansion in one country produces deflationary pressure abroad. There is an instant decline in the world interest rate followed by a gradual rise. Exchange rates may overshoot or undershoot their steady-state level. The same applies to capital flows, but there is no correspondence between the paths of exchange rates and capital flows. Copyright 1987 by Ohio State University Press.

Date: 1987
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