Kiel Working Papers, Kiel Institute for World Economics
No 1110:
Capital Mobility, Consumption Substitutability, and the Effectiveness of Monetary Policy in Open Economies
Christian Pierdzioch
Abstract: This paper uses a dynamic general equilibrium two-country
optimizing model to analyze the consequences of international capital
mobility for the effectiveness of monetary policy in open economies. The
model shows that the substitutability of goods produced in different
countries plays a central role for the impact of international capital
mobility on the effectiveness of monetary policy. Paralleling the results
of the traditional Mundell-Fleming model, a higher degree of international
capital mobility increases the effectiveness of monetary policy only if the
Marshall-Lerner condition, which is linked to the cross-country
substitutability of goods, holds.
Keywords: Monetary policy; Capital mobility; (follow links to similar papers)
JEL-Codes: F32; F36; F41; (follow links to similar papers)
24 pages, May 2002
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