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

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Author Info
Svensson, Lars E O
van Wijnbergen, Sweder

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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, the 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. Copyright 1989 by Royal Economic Society.

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Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 99 (1989)
Issue (Month): 397 (September)
Pages: 785-805
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Handle: RePEc:ecj:econjl:v:99:y:1989:i:397:p:785-805

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Feltenstein, Andrew & Lebow, David & van Wijnbergen, Sweder, 1990. "Savings, Commodity Market Rationing, and the Real Rate of Interest in China," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 22(2), pages 234-52, May. [Downloadable!] (restricted)
  2. Joshua Aizenman, 1989. "Monopolistic Competition, Relative Prices and Output Adjustment in the Open Economy," NBER Working Papers 1787, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June. [Downloadable!] (restricted)
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  4. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November. [Downloadable!] (restricted)
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