Working Paper: NBER ID: w2262
Authors: Lars E.O. Svensson; Sweder van Wijnbergen
Abstract: A stochastic two-country neoclassical rational expectations model with sticky prices -- optimally set by monopolistically competitive firms -- and possible excess capacity is developed to examine international spillover effects on output of monetary disturbances. The Mundell-Fleming model predicts that monetary expansion at home leads to recession abroad. In contrast, our main result is that spillover effects of monetary policy may be either positive or negative, depending upon whether the intertemporal elasticity of substitution in consumption exceeds the intratemporal elasticity of substitution. The model in addition is used to determine nominal and real interest rates, exchange rates, and other asset prices.
Keywords: Monetary Policy; International Economics; Sticky Prices; Rational Expectations
JEL Codes: E32; E52; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Monetary expansion at home (E49) | Recession abroad (F44) |
| Intertemporal elasticity exceeds intratemporal elasticity (D15) | Positive spillover effects from foreign monetary expansion to home output (F41) |
| Intertemporal elasticity lower than intratemporal elasticity (D15) | Negative spillover effects from foreign monetary expansion to home output (F41) |
| Nature of the regime (P26) | Influence on spillover effects (C21) |
| Monetary disturbances (E49) | Influence on nominal and real interest rates, exchange rates, and other asset prices (E43) |