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http://hdl.handle.net/10419/43195
  
Title:Does trade integration alter monetary policy transmission? PDF Logo
Authors:Cwik, Tobias J.
Müller, Gernot J.
Wolters, Maik H.
Issue Date:2008
Series/Report no.:CFS Working Paper 2008/29
Abstract:This paper explores the role of trade integrationor opennessfor monetary policy transmission in a medium-scale New Keynesian model. Allowing for strategic complementarities in price-setting, we highlight a new dimension of the exchange rate channel by which monetary policy directly impacts domestic inflation. Although the strength of this effect increases with economic openness, it also requires that import prices respond to exchange rate changes. In this case domestic producers find it optimal to adjust their prices to exchange rate changes which alter the domestic currency price of their foreign competitors. We pin down key parameters of the model by matching impulse responses obtained from a vector autoregression on U.S. time series relative to an aggregate of industrialized countries. While we find evidence for strong complementarities, exchange rate pass-through is limited. Openness has therefore little bearing on monetary transmission in the estimated model.
Subjects:Monetary Policy Transmission
Open Economy
Trade Integration
Exchange Rate Channel
Strategic Complementarity
Exchange Rate Pass-Through
JEL:F41
F42
E52
Persistent Identifier of the first edition:urn:nbn:de:hebis:30-57676
Document Type:Working Paper
Appears in Collections:CFS Working Paper Series, Universität Frankfurt a. M.

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