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Production interdependence and welfare

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  • Kevin X. D. Huang
  • Zheng Liu

Abstract

The international welfare effects of a country?s monetary policy shocks have been controversial in the literature. While a unilateral monetary expansion increases the production efficiency in each country, it affects terms of trade in favor of one country against another depending on the currencies of price setting. We show that the increased world production interdependence magnifies the efficiency-improvement effect while dampening the terms-of-trade effect. As a consequence, a unilateral monetary expansion can be mutually beneficial and thus Pareto improving regardless of in which currency unit prices are set. In this sense, international monetary policy transmission may not be a source of potential conflict in a world with production interdependence.

Suggested Citation

  • Kevin X. D. Huang & Zheng Liu, 2004. "Production interdependence and welfare," Research Working Paper RWP 04-04, Federal Reserve Bank of Kansas City.
    • Handle: RePEc:fip:fedkrw:rwp04-04
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    Cited by:

    1. F. Miguel & T. Gómez & M. Luque & F. Ruiz & R. Caballero, 2009. "A Decomposition-Coordination Method For Complex Multi-Objective Systems," Asia-Pacific Journal of Operational Research (APJOR), World Scientific Publishing Co. Pte. Ltd., vol. 26(06), pages 735-757.
    2. Balistreri, Edward J. & Markusen, James R., 2009. "Sub-national differentiation and the role of the firm in optimal international pricing," Economic Modelling, Elsevier, vol. 26(1), pages 47-62, January.
    3. Wolfram Berger, 2010. "International Policy Coordination and Simple Monetary Policy Rules," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 146(II), pages 451-479, June.
    4. Berger, Wolfram, 2006. "International interdependence and the welfare effects of monetary policy," International Review of Economics & Finance, Elsevier, vol. 15(4), pages 399-416.
    5. Liu, Zheng & Pappa, Evi, 2008. "Gains from international monetary policy coordination: Does it pay to be different?," Journal of Economic Dynamics and Control, Elsevier, vol. 32(7), pages 2085-2117, July.
    6. Zheng Liu & Evi Pappa, 2005. "Gains from Coordination in a Multi-Sector Open Economy: Does it Pay to be Different?," Working Papers 296, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    7. Kumhof, Michael & Laxton, Doug & Naknoi, Kanda, 2005. "On the Benefits of Exchange Rate Flexibility under Endogenous Tradedness of Goods," Conference papers 331319, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.

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    More about this item

    Keywords

    Welfare; Monetary policy; Monopolistic competition; Competition; Production (Economic theory);
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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