Capital Mobility, Consumption Substitutability, and the Effectiveness of Monetary Policy in Open Economies

Christian Pierdzioch

No 1110, Kiel Working Papers from Kiel Institute for the World Economy (IfW Kiel)

Abstract: This paper uses a dynamic general equilibrium two-country optimizing model to analyze the consequences of international capital mobility for the effectiveness of monetary policy in open economies. The model shows that the substitutability of goods produced in different countries plays a central role for the impact of international capital mobility on the effectiveness of monetary policy. Paralleling the results of the traditional Mundell-Fleming model, a higher degree of international capital mobility increases the effectiveness of monetary policy only if the Marshall-Lerner condition, which is linked to the cross-country substitutability of goods, holds.

Keywords: Monetary policy; Capital mobility (search for similar items in EconPapers)
JEL-codes: F32 F36 F41 (search for similar items in EconPapers)
Date: 2002
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:ifwkwp:1110

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