Monetary Expansion in an Open Economy of Intermediate Size*

This paper introduces a monetary asset, perceived as an addition to wealth, into a two-country neoclassical model of accumulation. As domestic monetary expansion changes, demand for the investment good is shifted. This alters the terms and level of trade as well as production and shifts the balanced growth paths of both economies. For a non-specialized world it is found that an increase in domestic monetary expansion will increase the domestic overall capital intensity, decrease the foreign overall capital intensity, and worsen the terms of trade for the country importing the investment good.