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Schmidt, Caroline
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Arbeitspapiere // Konjunkturforschungsstelle, Eidgenössische Technische Hochschule Zürich 102
How does an unexpected domestic monetary expansion affect the foreign economy? Does it induce an increase or a decline in foreign production? In the traditional two-country Mundell-Fleming model, monetary policy has beggar-thy-neighbor effects. Yet, empirical evidence from VARs indicates that U.S. monetary policy has positive international transmission effects on both foreign (non-U.S. G-7) output and aggregate demand. In this paper, I will show that a two-country dynamic general equilibrium model with sticky prices can account for these stylized facts if we allow for international asymmetries in the price-setting behavior of firms. If U.S. firms set export prices in their own currency only (producer-currency pricing), whereas producers in the rest of the world price their exports to the U.S. in the local currency of the export market (local-currency pricing), a U.S. monetary expansion is found to increase output and aggregate demand abroad.
Local-currency pricing
Producer-currency pricing
New Open Economy Macroeconomics
International transmission effects of monetary policy
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Working Paper

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