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Kiel Institute for World Economics Kiel Working Papers, Kiel Institute for World Economics

No 1141:
Home-Product Bias, Capital Mobility, and the Effects of Monetary Policy Shocks 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 effects of monetary policy in open economies. The model shows that the difference between the short-run output effects of monetary policy shocks in a world of high capital mobility and those in a world of low capital mobility decreases if households have a home-product bias in preferences. This result implies that, in contrast to conventional wisdom derived from the textbook Mundell-Fleming model, the empirically observed integration of international financial markets need not result in a significant change in the propagation of monetary policy shocks if households have a strong bias for consuming home products.

Keywords: Monetary Policy; Capital mobility; Home-product bias; (follow links to similar papers)

JEL-Codes: F32; F36; F41; (follow links to similar papers)

24 pages, January 2003

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