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International transmission effects of monetary policy shocks: can asymmetric price setting explain the stylized facts?

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  • Caroline Schmidt

    (Swiss Institute for Business Cycle Research, Switzerland)

Abstract

How does an unexpected domestic monetary expansion affect the foreign economy? Does it induce an increase or a decline in foreign production? In the traditional two-country Mundell-Fleming model, monetary policy reveals 'beggar-thy-neighbour' effects. Yet, empirical evidence from VARs indicates that US monetary policy has positive international transmission effects on both foreign (non-US G-7) output and aggregate demand. In this paper, I show that a two-country dynamic general equilibrium model with sticky prices can account for these 'stylized facts' if we introduce international asymmetries in the price-setting behaviour of firms insofar as home (US) firms set export prices in their own currency only (producer-currency pricing), whereas producers in the rest of the world price their exports to the US in the local currency of the export market (local-currency pricing). Copyright © 2006 John Wiley & Sons, Ltd.

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  • Caroline Schmidt, 2006. "International transmission effects of monetary policy shocks: can asymmetric price setting explain the stylized facts?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 11(3), pages 205-218.
    • Handle: RePEc:ijf:ijfiec:v:11:y:2006:i:3:p:205-218
    DOI: 10.1002/ijfe.293
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    3. Konstantins Benkovskis & Andrejs Bessonovs & Martin Feldkircher & Julia Wörz, 2011. "The Transmission of Euro Area Monetary Shocks to the Czech Republic, Poland and Hungary: Evidence from a FAVAR Model," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 3, pages 8-36.
    4. Rüffer, Rasmus & Stracca, Livio, 2006. "What is global excess liquidity, and does it matter?," Working Paper Series 696, European Central Bank.
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    6. Chung-Fu Lai & Wen-Fang Wang, 2016. "Fiscal Policy in a Floating Exchange Rate Regime with Consumption Home Bias," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 8(6), pages 1-24, June.
    7. Mansoorian, Arman & Mohsin, Mohammed, 2013. "Real asset returns, inflation and activity in a small, open, Cash-in-Advance economy," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 234-250.
    8. Juha Tervala, 2019. "U.S. monetary policy and China's exchange rate policy during the great recession," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 24(1), pages 113-130, January.
    9. Chung-Fu Lai & Xi-Tsz Lee, 2016. "The Effects of Antidumping Duties in a New Open Economy Macroeconomics Model," International Journal of Economics and Financial Issues, Econjournals, vol. 6(3), pages 837-844.
    10. Chung-Fu Lai, 2018. "Fiscal Policy and Macroeconomic Fluctuations in a Fixed Exchange Rate Regime," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 8(10), pages 1257-1273, October.
    11. Anders C. Johansson, 2012. "China’s Growing Influence in Southeast Asia – Monetary Policy and Equity Markets," The World Economy, Wiley Blackwell, vol. 35(7), pages 816-837, July.
    12. Ming-Yuan Leon Li, 2009. "Reexamining asymmetric effects of monetary and government spending policies on economic growth using quantile regression," Journal of Developing Areas, Tennessee State University, College of Business, vol. 43(1), pages 137-154, September.
    13. Juha Tervala, 2011. "Export pricing and the cross‐country correlation of stock prices," Review of Financial Economics, John Wiley & Sons, vol. 20(2), pages 74-83, May.
    14. Sheng Wang & Rufei Guo, 2016. "Asymmetric Exchange Rate Pass-through and Monetary Policy in Open Economy," Annals of Economics and Finance, Society for AEF, vol. 17(1), pages 33-53, May.
    15. Tervala, Juha, 2011. "Export pricing and the cross-country correlation of stock prices," Review of Financial Economics, Elsevier, vol. 20(2), pages 74-83, May.

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    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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