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On the efficiency of monetary and fiscal policy in open economies

Chan Wang and Heng-Fu Zou ()

No 534, CEMA Working Papers from China Economics and Management Academy, Central University of Finance and Economics

Abstract: This paper investigates the efficiency of monetary and fiscal policy in a two-country general equilibrium model with monopolistic competition and wage stickiness. When monopoly distortions are completely eliminated, we find that stochastic government spending can affect the efficiency of the global monetary policy that replicates the real allocation under flexible wages. When the stochastic government spending is present, we find that the monopoly distortions can also affect the efficiency of the global monetary policy that replicates the real allocation under flexible wages. The combination of proportional subsidy policies used to completely eliminate monopoly distortions and the monetary policy replicating the real allocation under flexible wages can be improved after we introduce the stochastic government spending. Fiscal policy is found to be unable to replicate the real allocation under flexible wages.

Keywords: New open-economy macroeconomics; Efficiency of global monetary policy; Stochastic government spending; Monopoly distortions (search for similar items in EconPapers)
Pages: 25 pages
Date: 2012-02-13
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-opm
Note: Very preliminary version. Comments welcome.
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Related works:
Journal Article: On the efficiency of monetary and fiscal policy in open economies (2013) Downloads
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