Does trade integration alter monetary policy transmission?

This paper explores the role of trade integration—or openness—for monetary policy transmission in a medium-scale New Keynesian model. Allowing for strategic complementarities in price-setting, we highlight a new dimensio
This paper explores the role of trade integration—or openness—for monetary policy transmission in a medium-scale New Keynesian model. Allowing for strategic complementarities in price-setting, we highlight a new dimension of the exchange rate channel by which monetary policy directly impacts domestic inflation. Although the strength of this effect increases with economic openness, it also requires that import prices respond to exchange rate changes. In this case domestic producers find it optimal to adjust their prices to exchange rate changes which alter the domestic currency price of their foreign competitors. We pin down key parameters of the model by matching impulse responses obtained from a vector autoregression on U.S. time series relative to an aggregate of industrialized countries. While we find evidence for strong complementarities, exchange rate pass-through is limited. Openness has therefore little bearing on monetary transmission in the estimated model.
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Metadaten
Author:Tobias J. Cwik, Gernot J. Müller, Maik Hendrik Wolters
URN:urn:nbn:de:hebis:30-57676
Parent Title (German):CFS working paper series ; 2008, 29
Series (Serial Number):CFS working paper series (2008, 29)
Document Type:Working Paper
Language:English
Date of Publication (online):2008/09/24
Year of first Publication:2008
Publishing Institution:Univ.-Bibliothek Frankfurt am Main
Release Date:2008/09/24
Tag:Exchange Rate Channel ; Exchange Rate Pass-Through; Monetary Policy Transmission ; Open Economy ; Strategic Complementarity ; Trade Integration
HeBIS PPN:205705693
Institutes:Center for Financial Studies (CFS)
Dewey Decimal Classification:330 Wirtschaft
JEL-Classification:E52 Monetary Policy
F41 Open Economy Macroeconomics
F42 International Policy Coordination and Transmission
Sammlungen:Universitätspublikationen
Licence (German):License Logo Veröffentlichungsvertrag für Publikationen

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