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The Effectiveness of Monetary and Fiscal Policy with Different Degrees of Goods and Financial Market Integration

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  • Özge Senay

Abstract

Given the importance of economic integration and the concern for macroeconomic stabilisation, it is important to understand how increasing integration alters the effectiveness of government policy tools. This paper aims to determine how increasing goods and financial market integration changes the effectiveness of fiscal and monetary policy. Expansionary monetary and fiscal policies are analysed under different degrees of goods and financial market integration in a dynamic general equilibrium framework. Imperfect goods market integration is represented by the presence of pricing-to-market behaviour by firms and imperfect financial market integration is represented by agents facing adjustment costs to foreign asset stock changes. Simulations show that the effectiveness of fiscal and monetary policy change significantly depending on the presence of incompletely integrated goods and/or financial markets. While financial market integration increases the effectiveness of monetary policy, it diminishes the effectiveness of fiscal policy. Goods market integration increases the effectiveness of both monetary and fiscal policy.

Suggested Citation

  • Özge Senay, "undated". "The Effectiveness of Monetary and Fiscal Policy with Different Degrees of Goods and Financial Market Integration," Discussion Papers 98/14, Department of Economics, University of York.
    • Handle: RePEc:yor:yorken:98/14
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    File URL: https://www.york.ac.uk/media/economics/documents/discussionpapers/1998/9814.pdf
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    References listed on IDEAS

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    1. Kollman, R., 1996. "The Exchange Rate in a Dynamic-Optimizing Current Account Model with Nominal Rigidities: a Quantitative Investigation," Cahiers de recherche 9614, Universite de Montreal, Departement de sciences economiques.
    2. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
    3. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-1176, December.
    4. Obstfeld, Maurice & Rogoff, Kenneth, 1995. "Exchange Rate Dynamics Redux," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 624-660, June.
    5. Betts, Caroline & Devereux, Michael B., 1996. "The exchange rate in a model of pricing-to-market," European Economic Review, Elsevier, vol. 40(3-5), pages 1007-1021, April.
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    Cited by:

    1. Cakici, S. Meral, 2011. "Financial integration and business cycles in a small open economy," Journal of International Money and Finance, Elsevier, vol. 30(7), pages 1280-1302.
    2. Darius, Reginald, 2010. "The macroeconomic effects of monetary and fiscal policy in a small open economy: Does the exchange rate regime matter?," Journal of International Money and Finance, Elsevier, vol. 29(8), pages 1508-1528, December.
    3. Cakici, S. Meral, 2012. "Technology shocks under varying degrees of financial openness," International Review of Economics & Finance, Elsevier, vol. 21(1), pages 232-245.

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    More about this item

    Keywords

    Policy effectiveness; pricing-to-market; goods market integration; financial market integration;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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