Working Paper: NBER ID: w1003
Authors: Julio J. Rotemberg
Abstract: This paper examines the connection between money and the terms of trade in the context of a simple monetary equilibrium model with flexible prices. Money is held for transactions purposes. Because carrying out financial transactions is costly, households visit their financial intermediaries only occasionally. An important feature of the model is that different households visit the financial intermediaries at different times. This is sufficient to ensure that even though the model features perfect foresight and competitive markets, monetary policies affect output under both fixed and flexible exchange rates. Moreover, in the latter regime expansionary monetary policies tend to worsen the terms of trade while this is not the case under fixed exchange rates.
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JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increase in money supply (E51) | Deterioration of terms of trade (F14) |
| Increase in money supply (E51) | Increase in domestic prices (P22) |
| Increase in domestic prices (P22) | Reduced purchasing power of households (D12) |
| Reduced purchasing power of households (D12) | Reduced consumption (E21) |
| Reduced consumption (E21) | Excess supply of domestic goods (H49) |
| Excess supply of domestic goods (H49) | Deterioration of terms of trade (F14) |