Production interdependence and welfare

Arbeitspapier

The international welfare effects of a country's monetary policy shocks have been controversial in the new open economy macro (i.e., NOEM) literature. While a unilateral monetary expansion increases the production efficiency in each country, it affects the terms of trade in favor of one country against another depending on the currencies of price setting. In this paper, we incorporate multiple stages of production and trade into a standard NEOM model to capture world production interdependence, and show that increased world production interdependence tends to magnify the e±ciency-improvement effect while dampening the terms-of-trade effect. As a consequence, a unilateral monetary expansion can be mutually beneficial regardless of in which currency prices are set. In this sense, international monetary policy transmission may not be a source of potential conflict in a world with production interdependence.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: ECB Working Paper ; No. 355

Classification and Topics

• Classification: Wirtschaft ; Business Fluctuations; Cycles ; Foreign Exchange ; Open Economy Macroeconomics
• Subject: Local currency pricing ; Monopolistic competition ; Stages of processing ; Welfare

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Huang, Kevin X. D. ; Liu, Zheng
• Event: Veröffentlichung
• (who): European Central Bank (ECB)
• (where): Frankfurt a. M.
• (when): 2004

Further information

• Handle: http://hdl.handle.net/10419/152789
• Last update: 10.03.2025, 11:44 AM CET