Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/233282 
Authors: 
Year of Publication: 
2011
Series/Report no.: 
Discussion paper No. 66
Publisher: 
Aboa Centre for Economics (ACE), Turku
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 beggarthyself 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.
Subjects: 
Open economy macroeconomics
monetary policy
beggar-thyself
beggar-thy-neighbour
Taylor rule
welfare analysis
JEL: 
E32
E52
F30
F41
F44
Document Type: 
Working Paper

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