Kiel Working Papers, Kiel Institute for World Economics
No 1166:
Keeping Up with the Joneses: Implications for the Welfare Effects of Monetary Policy in Open Economies
Christian Pierdzioch
Abstract: A dynamic general equilibrium two-country optimizing model
is used to analyze the welfare effects of monetary policy in open
economies. The distinguishing feature of the model is that households
preferences feature a "keeping up with the Joneses" effect. This effect
implies that households utility depends upon the level of their
consumption relative to the aggregate level of consumption. The model
implies that, depending on the strength of the "keeping up with the
Joneses" effect, an expansive monetary policy can be a "beggar-thyself"
policy. Moreover, the welfare effects of monetary policy are asymmetric
across countries.
Keywords: Monetary policy; Consumption externality; Welfare effects; (follow links to similar papers)
JEL-Codes: F41; F42; (follow links to similar papers)
16 pages, May 2003
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