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International trade in intermediate inputs and the welfare gains from monetary policy cooperation

Liutang Gong (), Jianjian Liu (), Chan Wang (), Liyuan Wu () and Heng-Fu Zou ()
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Jianjian Liu: Guanghua School of Management and LMEQF Peking University
Chan Wang: School of Finance, Central University of Finance and Ecoonomics
Liyuan Wu: Guanghua School of Management and LMEQF Peking University

No 610, CEMA Working Papers from China Economics and Management Academy, Central University of Finance and Economics

Abstract: This paper introduces international trade in intermediate inputs into Clarida et al.(2002) to examine the welfare gains from monetary policy cooperation when the world is hit by cost-push shocks. We find that Clarida et al.(2002)'s prediction is right. Specifically, the introduction of the international trade in intermediate inputs opens a new channel through which the terms of trade at the stage of intermediate-goods production produce the spillover effect. In Clarida et al. (2002), the risk sharing effect and the terms of trade effect cancel out and the welfare gains from monetary policy cooperation disappear when the utility function of consumption is logarithmic. By contrast, in our model, the new channel still works. By internalizing the spillover effect produced through the new channel, the cooperative monetary policymaker achieves the welfare gains which are substantially larger than those found in the literature. In addition, we find that the welfare gains increase with the degree of intermediate-goods trade openness.

Pages: 27 pages
Date: 2020
New Economics Papers: this item is included in nep-dge and nep-int
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