EconStor >
Institut für Weltwirtschaft (IfW), Kiel >
Economics: The Open-Access, Open-Assessment E-Journal - Discussion Papers >

Please use this identifier to cite or link to this item:

http://hdl.handle.net/10419/52678
  
Title:International transmission of shocks, money illusion and the velocity of money PDF Logo
Authors:Sousa, Teresa
Issue Date:2011
Series/Report no.:Economics Discussion Papers 2011-49
Abstract:Money illusion is frequently invoked and frequently resisted by economists. Resisted as it contradicts the maximizing paradigm of microeconomic theory and invoked since a tendency to think in nominal rather than real terms becomes evident in the behavior of agents. This paper rationalizes money illusion in an stylized open economy model considering that private agents learn nominal aggregate demand at a level different from the one imposed by rationality. We find that the welfare effects of a productivity shock are increasing in the degree of money illusion and decreasing in the degree of openness of the economy. Furthermore we introduce a velocity of money shock revisiting the Quantity Theory of Money within the open economy micro-founded framework. An incomplete information game between Home and Foreign policymakers with monetary policy rules is developed, where sudden unstable financial conditions arise in one country, to find that allowing for velocity shocks reinforces the need for optimal monetary policy rules and to open the economies in order to avoid welfare costs.
Subjects:Optimal monetary policy
open economy
international transmission mechanism
money illusion
velocity of money
nominal rigidities
JEL:E31
E52
F42
Creative Commons License:http://creativecommons.org/licenses/by-nc/2.0/de/deed.en
Document Type:Working Paper
Appears in Collections:Economics: The Open-Access, Open-Assessment E-Journal - Discussion Papers

Files in This Item:
File Description SizeFormat
675430356.pdf314.2 kBAdobe PDF
No. of Downloads: Counter Stats
Download bibliographical data as: BibTeX
Share on:http://hdl.handle.net/10419/52678

Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.