International welfare effects of monetary policy |
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Authors: | Juha Tervala |
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Affiliation: | Aboa Centre for Economics, Department of Economics, Rehtorinpellonkatu 3, 20500 Turku, Finland |
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Abstract: | In this paper, I examine the international welfare effects of monetary policy. I develop a New Keynesian two-country model, where central banks in both countries follow the Taylor rule. I show that a decrease in the domestic interest rate, under producer currency pricing, is a beggar-thyself policy that reduces domestic welfare and increases foreign welfare in the short term, regardless of whether the cross-country substitutability is high or low. In the medium term, it is a beggar-thy-neighbour (beggar-thyself) policy, if the Marshall-Lerner condition is satisfied (violated). Under local currency pricing, a decrease in the domestic interest rate is a beggar-thy-neighbour policy in the short term, but a beggar-thyself policy in the medium term. Both under producer and local currency pricing, a monetary expansion increases world welfare in the short term, but reduces it in the medium term. |
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Keywords: | E32 E52 F30 F41 F44 |
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