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Real effects of monetary policy in a world economy

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  • Preston J. Miller
  • Richard M. Todd

Abstract

We present a 2-country model with heterogeneous agents in which changes in a country?s monetary policy affect real interest rates, relative prices of traded and nontraded goods and real exchange rates. Nontransitory real effects of monetary policy stem solely from a friction (country-specific reserve requirements) that generates separate demands for a country?s money and bonds. Without violating the classical assumptions of individual rationality and flexible prices, the model?s implications seem qualitatively in accord with the U.S. experience of the 1980s: a monetary policy tightening leading to a rise in the real interest rate and to an initial rise in the real value of the dollar which is subsequently reversed. In the model a monetary policy change leads to different welfare effects for agents born at different times, living in different countries, or participating on different sides of a market. The welfare of some agents can be affected more by relative price changes than by real interest rate changes.

Suggested Citation

  • Preston J. Miller & Richard M. Todd, 1992. "Real effects of monetary policy in a world economy," Staff Report 154, Federal Reserve Bank of Minneapolis.
    • Handle: RePEc:fip:fedmsr:154
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    References listed on IDEAS

    as
    1. Preston J. Miller, 1982. "Fiscal policy in a monetarist model," Staff Report 67, Federal Reserve Bank of Minneapolis.
    2. David Orden, 1986. "A Critique of Exchange Rate Treatment in Agricultural Trade Models: Comment," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 68(4), pages 990-993.
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    5. Miller, Preston J & Roberds, William T, 1991. "The Quantitative Significance of the Lucas Critique," Journal of Business & Economic Statistics, American Statistical Association, vol. 9(4), pages 361-387, October.
    6. Preston J. Miller & Neil Wallace, 1985. "International coordination of macroeconomic policies: a welfare analysis," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 9(Spr).
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    Cited by:

    1. Miller, Preston J. & Todd, Richard M., 1995. "Real effects of monetary policy in a world economy," Journal of Economic Dynamics and Control, Elsevier, vol. 19(1-2), pages 125-153.
    2. Geza, Paula & Giurca Vasilescu, Laura, 2011. "Bretton Woods Fixed Exchange Rate System versus Floating Exchange Rate System," MPRA Paper 29932, University Library of Munich, Germany.
    3. Daniel M. Chin & Preston J. Miller, 1995. "Fixed vs. floating exchange rates: a dynamic general equilibrium analysis," Staff Report 194, Federal Reserve Bank of Minneapolis.
    4. Chin, Daniel M. & Miller, Preston J., 1998. "Fixed vs. floating exchange rates: A dynamic general equilibrium analysis," European Economic Review, Elsevier, vol. 42(7), pages 1221-1249, July.

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