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INTERNATIONAL TRANSMISSION OF MONETARY SHOCKS WITH INTEREST RATE RULE Abstract: This paper explores the implications of monetary policy rules in the general equilibrium two-country framework of Obstfeld and Rogo (1995). It is argued that the sign of the correlation of domestic and foreign outputs can be positive after a monetary shock, contrary to the standard result. The reason is that an interest rate rule targeting the consumer price index implies less volatile terms of trade and this reduces the expenditure switching e¤ect, and thus the demand e¤ect through the fall of the real interest rate prevails. It is also shown that inertia in the interest rate rule is a necessary condition for the model to display persistence of the real variables after a shock to the interest rate rule

Carlos Borondo
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Carlos Borondo: University of Valladolid

No 00-04, Working Papers from Asociación Española de Economía y Finanzas Internacionales

Keywords: Monetary Policy Rules; International Transmission; Staggered Prices; Two-Country model (search for similar items in EconPapers)
JEL-codes: E32 E52 F41 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2000-07
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