Real effects of monetary policy in a world economy

Preston J. Miller and Richard M. Todd

No 154, Staff Report from Federal Reserve Bank of Minneapolis

Abstract: We present a 2-country model with heterogeneous agents in which changes in a country?s monetary policy affect real interest rates, relative prices of traded and nontraded goods and real exchange rates. Nontransitory real effects of monetary policy stem solely from a friction (country-specific reserve requirements) that generates separate demands for a country?s money and bonds. Without violating the classical assumptions of individual rationality and flexible prices, the model?s implications seem qualitatively in accord with the U.S. experience of the 1980s: a monetary policy tightening leading to a rise in the real interest rate and to an initial rise in the real value of the dollar which is subsequently reversed. In the model a monetary policy change leads to different welfare effects for agents born at different times, living in different countries, or participating on different sides of a market. The welfare of some agents can be affected more by relative price changes than by real interest rate changes.

Keywords: Monetary; policy (search for similar items in EconPapers)
Date: 1992
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Citations: View citations in EconPapers (4)

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