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U.S.-Europe Economic Interdependence and Policy Transmission

Author

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  • Fabio Ghironi

    (Boston College)

Abstract

This paper proposes a microfounded general equilibrium model of the U.S. and European economies suitable for analyzing the transmission of monetary and fiscal policy shocks between the U.S. and Europe. The focus is on understanding the determinants of transatlantic economic interdependence. A positive analysis of the consequences of policy changes in the U.S. and Europe is made and results about the transmission of such shocks are obtained. In the model, consumer preferences in the U.S. and Europe are biased in favor of goods produced in the continent where agents reside. Hence, PPP does not hold across the Atlantic, except in steady state. However, this is not sufficient to cause overshooting of the dollar exchange rate following policy shocks. U.S. current-account surplus can be achieved by means of a monetary expansion, a persistent increase in government spending, and/or higher long-run distortionary taxes relative to Europe.

Suggested Citation

  • Fabio Ghironi, 2000. "U.S.-Europe Economic Interdependence and Policy Transmission," Boston College Working Papers in Economics 470, Boston College Department of Economics.
    • Handle: RePEc:boc:bocoec:470
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    References listed on IDEAS

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    Cited by:

    1. Barry Eichengreen & Fabio Ghironi, 1999. "Macroeconomic Tradeoffs in the United States and Europe: Fiscal Distortions and the International Monetary Regime," Boston College Working Papers in Economics 467, Boston College Department of Economics.
    2. Fabio Ghironi, 2000. "Towards new open economy macroeconometrics," Staff Reports 100, Federal Reserve Bank of New York.

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    More about this item

    Keywords

    Europe; Macroeconomic interdependence; Monetary policy; Fiscal policy; United States;
    All these keywords.

    JEL classification:

    • F3 - International Economics - - International Finance
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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