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Welfare effects of monetary policy in an economy with vertical production and trade: An analysis based on the perspective of local currency pricing

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  • Dohwa, Kohjiro

Abstract

By incorporating the factor of firms' asymmetric price setting behavior into the two-country model with vertical production and trade, we analyze how one country's monetary policy affects the welfare of both countries. We show that an expansionary monetary policy has (i) a beggar-thyself effect if the ratio of the non-expanding country's intermediate goods firms that set their export prices in the local currency is significantly low and (ii) a prosper-thy-neighbor effect in our model regardless of the ratio of either country's intermediate goods firms that set their export prices in the local currency.

Suggested Citation

  • Dohwa, Kohjiro, 2014. "Welfare effects of monetary policy in an economy with vertical production and trade: An analysis based on the perspective of local currency pricing," Economic Modelling, Elsevier, vol. 41(C), pages 408-420.
    • Handle: RePEc:eee:ecmode:v:41:y:2014:i:c:p:408-420
    DOI: 10.1016/j.econmod.2014.03.001
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    More about this item

    Keywords

    Local currency pricing; Vertical production and trade; Monetary policy; Beggar-thyself; Prosper-thy-neighbor;
    All these keywords.

    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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