U.S.-Europe Economic Interdependence and Policy Transmission

Fabio Ghironi

No 470, Boston College Working Papers in Economics from Boston College Department of Economics

Abstract: This paper proposes a microfounded general equilibrium model of the U.S. and European economies suitable for analyzing the transmission of monetary and fiscal policy shocks between the U.S. and Europe. The focus is on understanding the determinants of transatlantic economic interdependence. A positive analysis of the consequences of policy changes in the U.S. and Europe is made and results about the transmission of such shocks are obtained. In the model, consumer preferences in the U.S. and Europe are biased in favor of goods produced in the continent where agents reside. Hence, PPP does not hold across the Atlantic, except in steady state. However, this is not sufficient to cause overshooting of the dollar exchange rate following policy shocks. U.S. current-account surplus can be achieved by means of a monetary expansion, a persistent increase in government spending, and/or higher long-run distortionary taxes relative to Europe.

Keywords: Europe; Macroeconomic interdependence; Monetary policy; Fiscal policy; United States (search for similar items in EconPapers)
JEL-codes: F3 F41 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2000-01-10
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:boc:bocoec:470

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