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The role of consumption substitutability in the international transmission of shocks

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  • Cédric Tille

Abstract

This paper develops a general framework to analyze the welfare consequences of monetary and fiscal shocks in an open economy, focusing on the role of the degree of substitutability between goods produced in different countries. We find that an expansionary shock that would be beneficial in a closed economy can have an adverse \\"beggar-thyself\\" effect in the country where it takes place, or an adverse \\"beggar-thy-neighbor\\" effect on its neighbor. Such effects depend significantly on the degree of substitutability between goods produced in different countries, as well as the exact nature of the shocks. In addition, a closed economy can be an imperfect approximation of a large open economy when there is little substitutability between goods produced in different countries.

Suggested Citation

  • Cédric Tille, 1999. "The role of consumption substitutability in the international transmission of shocks," Staff Reports 67, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednsr:67
    Note: For a published version of this report, see Cédric Tille, "The Role of Consumption Substitutability in the International Transmission of Shocks," Journal of International Economics53, no.2 (April 2001): 421-4.
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    Cited by:

    1. Dirk Steffen & Ingo Pitterle, 2004. "Spillover Effects of Fiscal Policy Under Flexible Exchange Rates," Econometric Society 2004 Australasian Meetings 286, Econometric Society.
    2. Giancarlo Corsetti & Paolo Pesenti, 2009. "The Simple Geometry of Transmission and Stabilization in Closed and Open Economies," NBER Chapters, in: NBER International Seminar on Macroeconomics 2007, pages 65-116, National Bureau of Economic Research, Inc.
    3. Pierpaolo Benigno, 2009. "Price Stability with Imperfect Financial Integration," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(s1), pages 121-149, February.
    4. Carlos Borondo, "undated". "International Transmission of Monetary Shocks with Interest Rate Rule," Working Papers on International Economics and Finance 00-04, FEDEA.
    5. Tille, Cédric, 2008. "Financial integration and the wealth effect of exchange rate fluctuations," Journal of International Economics, Elsevier, vol. 75(2), pages 283-294, July.
    6. Corsetti, Giancarlo & Pesenti, Paolo, 2005. "International dimensions of optimal monetary policy," Journal of Monetary Economics, Elsevier, vol. 52(2), pages 281-305, March.
    7. Ippei Fujiwara & Naohisa Hirakata, 2009. "Dynamic Aspects of Productivity Spillovers, Terms of Trade, and the “Home Market Effect”," IMF Staff Papers, Palgrave Macmillan, vol. 56(4), pages 958-969, November.
    8. Linda S. Goldberg & Cédric Tille, 2006. "The internationalization of the dollar and trade balance adjustment," Staff Reports 255, Federal Reserve Bank of New York.
    9. Linda S. Goldberg & Cédric Tille, 2006. "The International Role of the Dollar and Trade Balance Adjustment," NBER Working Papers 12495, National Bureau of Economic Research, Inc.
    10. Lane, Philip & Ganelli, Giovanni, 2002. "Dynamic General Equilibrium Analysis: The Open Economy Dimension," CEPR Discussion Papers 3540, C.E.P.R. Discussion Papers.
    11. Juha Tervala, 2007. "Fiscal Policy and the Current Account in a Small Open Economy," Finnish Economic Papers, Finnish Economic Association, vol. 20(2), pages 108-120, Autumn.
    12. Mykhaylova, Olena, 2009. "Welfare implications of country size in a monetary union," MPRA Paper 23323, University Library of Munich, Germany.
    13. Ghironi, Fabio, 2006. "Macroeconomic interdependence under incomplete markets," Journal of International Economics, Elsevier, vol. 70(2), pages 428-450, December.
    14. Sutherland, Alan, 2002. "International monetary policy coordination and financial market integration," Working Paper Series 174, European Central Bank.
    15. Tille, Cedric, 2006. "On the distributional effects of exchange rate fluctuations," Journal of International Money and Finance, Elsevier, vol. 25(8), pages 1207-1225, December.
    16. Giancarlo Corsetti & Paolo Pesenti & Nouriel Roubini & Cédric Tille, 1999. "Competitive devaluations: a welfare-based approach," Staff Reports 58, Federal Reserve Bank of New York.
    17. Pitterle, Ingo & Steffen, Dirk, 2004. "Welfare Effects of Fiscal Policy under Alternative Exchange Rate Regimes : The Role of the Scale Variable of Money Demand," Tübinger Diskussionsbeiträge 284, University of Tübingen, School of Business and Economics.
    18. Coeurdacier, Nicolas, 2009. "Do trade costs in goods market lead to home bias in equities?," Journal of International Economics, Elsevier, vol. 77(1), pages 86-100, February.
    19. Rüffer, Rasmus & Stracca, Livio, 2006. "What is global excess liquidity, and does it matter?," Working Paper Series 696, European Central Bank.
    20. Benigno, Pierpaolo & Benigno, Gianluca, 2001. "Price Stability as a Nash Equilibrium in Monetary Open-Economy Models," CEPR Discussion Papers 2757, C.E.P.R. Discussion Papers.
    21. Cédric Tille, 2000. ""Beggar-thy-neighbor" or "beggar-thyself"? the income effect of exchange rate fluctuations," Staff Reports 112, Federal Reserve Bank of New York.
    22. Gianluca Benigno & Bianca De Paoli, 2010. "On the International Dimension of Fiscal Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(8), pages 1523-1542, December.
    23. Fabio Ghironi, 2000. "Alternative Monetary Rules for a Small Open Economy: The Case of Canada," Boston College Working Papers in Economics 466, Boston College Department of Economics, revised 30 Oct 2000.

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    More about this item

    Keywords

    Marshall-Lerner-Robinson condition; Beggar-thy-Neighbor;

    JEL classification:

    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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