Excess Capacity, Monopolistic Competition, and International Transmission of Monetary Disturbances

Lars Svensson and Sweder van Wijnbergen

No 2262, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: A stochastic two-country neoclassical rational expectations model with sticky prices -- optimally set by monopolistically competitive firms -- and possible excess capacity is developed to examine international spillover effects on output of monetary disturbances. The Mundell-Fleming model predicts that monetary expansion at home leads to recession abroad. In contrast, our main result is that spillover effects of monetary policy may be either positive or negative, depending upon whether the intertemporal elasticity of substitution in consumption exceeds the intratemporal elasticity of substitution. The model in addition is used to determine nominal and real interest rates, exchange rates, and other asset prices.

Date: 1987-05
Note: ITI IFM
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Published as The Economic Journal, Vol. 99, No. 397, pp. 785-805, (September 1989).

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