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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