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The Mundell-Fleming-Dornbusch Model in a New Bottle

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Author Info
Anthony Landry () (Economics Boston University)

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Abstract

We introduce elements of state-dependent pricing and strategic complementarity within an otherwise standard "New Open Economy Macroeconomics" model, and develop its implications for the dynamics of real and nominal economic activity. Under a traditional Producer-Currency-Pricing environment, our framework replicates key international features following a domestic monetary shock. In contrast with its time-dependent counterpart, our approach delivers (i) a high international output correlation relative to consumption correlation, (ii) a delayed surge in inflation across countries, (iii) a delayed overshooting of exchange rates, and (iv) a J-curve dynamic in the domestic trade balance. Moreover, our model emphasizes the expenditure-switching effect as an important channel of monetary policy transmission, and consequently keeps the spirit of the Mundell-Fleming-Dornbusch model within the confines of the microfounded dynamic general equilibrium approach

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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2005 with number 455.

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Date of creation: 11 Nov 2005
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Handle: RePEc:sce:scecf5:455

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Related research
Keywords: international monetary policy transmission; international comovements; state-dependent pricing; strategic complementarity.;

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Find related papers by JEL classification:
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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