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Monetary policy, trade, and endogenous growth under different international financial market structures

Michael Donadelli (), Patrick Grüning () and Aurelija Proskute
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Michael Donadelli: Ca'Foscari University of Venice
Patrick Grüning: CEFER, Bank of Lithuania and Vilnius University

No 57, Bank of Lithuania Working Paper Series from Bank of Lithuania

Abstract: This study develops a symmetric two-country New-Keynesian general equilibrium model with endogenous growth, Calvo-style price and wage rigidities, and international trade of final consumption goods and intermediate goods. The equilibrium implications of two financial market structures are compared: financial autarky and complete markets. In the case of financial autarky, no international bond is traded. In the case of complete markets, the households have access to a full set of international nominal state-contingent bonds. We find that assuming complete markets instead of financial autarky leads to higher co-movement of most macroeconomic growth rates across countries, higher co-movement of inflation rates across countries, lower uncovered interest rate parity regression coefficients, and a lower correlation between exchange rate growth and consumption growth differentials. These results are mostly in line with US and UK data from 1950-2015, which are split into two samples, 1950-1970 and 1971-2015, in order to be compared to the model with financial autarky and the model with complete markets, respectively.

Keywords: International financial markets; Monetary policy; Nominal rigidities; Endogenous growth (search for similar items in EconPapers)
JEL-codes: E30 E44 F44 G12 O30 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge, nep-fdg, nep-mac and nep-mon
Date: 2019-01-11
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