Kiel Working Papers, Kiel Institute for World Economics
No 1198:
On the Welfare Effects of Monetary Policy When Households Try to Keep Up with the Rest of the World
Christian Pierdzioch and Serkan Yener
Abstract: We develop a dynamic general equilibrium two-economy model
in order to analyze the welfare effects of monetary policy in open
economies. The model features two distortions: one distortion due to
monopolistic competition, and one distortion due to a consumption
externality. This consumption externality arises because households’
preferences feature a "keeping up with the rest of the world" effect. This
effect implies that households’ utility depends upon the level of their
consumption relative to the average consumption in the world. We show that,
depending on the relative magnitude of the monopolistic distortion and the
consumption externality, an expansive monetary policy can result in an
increase or a decrease of households’ welfare.
Keywords: Monetary policy; Consumption externality; Welfare effects; (follow links to similar papers)
JEL-Codes: F41,; F42; (follow links to similar papers)
15 pages, January 2004
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