Optimal Monetary Policy Under a Global Dollar Standard: The Effect of Vertical Trade and Production
Chan Wang and
Heng-Fu Zou ()
No 602, CEMA Working Papers from China Economics and Management Academy, Central University of Finance and Economics
This paper revisits Devereux et al. (J Int Econ 71:113â€“132 2007) which studies trade and macroeconomic behaviour in a two-country model under a reference currency such as the dollar in US-China trade. The home country (e.g. the US) sets its export prices in dollars and so does the foreign country (e.g. China), so that the US has Local Currency Pricing (LCP) of its imports while China has Producer Currency Pricing (PCP) of its imports. We crucially modify their model by adding the large and by now well-known trade in intermediate goods. The addition implies that there is now exchange-rate pass-through via intermediate-goods markets into US import prices which thereby become to some degree PCP like China; accordingly monetary expansion in the US now produces not merely an expansion effect in both countries but also an expenditure-switching effect towards itself by lowering its exchange rate and so raising the relative US consumer prices of Chinese goods. This modification has implications for the effects of monetary policy in both countries.
Keywords: Vertical production and trade; Reference-currency pricing; Optimal monetary policy; Exchange-rates pass-through (search for similar items in EconPapers)
JEL-codes: E5 F3 F4 (search for similar items in EconPapers)
Pages: 17 pages
References: Add references at CitEc
Citations: View citations in EconPapers (8) Track citations by RSS feed
Downloads: (external link)
Journal Article: Optimal Monetary Policy Under a Global Dollar Standard: The Effect of Vertical Trade and Production (2015)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:cuf:wpaper:602
Access Statistics for this paper
More papers in CEMA Working Papers from China Economics and Management Academy, Central University of Finance and Economics Contact information at EDIRC.
Bibliographic data for series maintained by Qiang Gao ().