In this paper, we consider how monetary policy in a large, foreign
economy affects optimal monetary policy in a small open economy
(home') in response to a large global demand shock that pushes both
economies to the zero lower bound (ZLB) on nominal interest rates.
We show that the inability of foreign monetary policy to stabilise
the foreign economy at the ZLB creates a spillover that affects how
well the home policymaker is able to stabilise its own economy. We
show that more stimulatory foreign policy worsens the home
policymaker's trade-off between stabilising inflation and the
output gap when home and foreign goods are close substitutes. This
reflects the fact that looser foreign policy leads to a relatively
more appreciated home real exchange rate, which induces large
expenditure switching away from home goods when goods are highly
substitutable--just at a time (at the ZLB) when home policy is
trying to boost demand for home goods. When goods are not close
substitutes the home policymaker's ability to stabilise the economy
benefits from more stimulatory foreign policy.
General
Imprint: |
Bibliogov
|
Country of origin: |
United States |
Release date: |
February 2013 |
First published: |
February 2013 |
Authors: |
Alex Haberis
|
Dimensions: |
246 x 189 x 2mm (L x W x T) |
Format: |
Paperback - Trade
|
Pages: |
36 |
ISBN-13: |
978-1-288-69806-6 |
Categories: |
Books >
Social sciences >
Politics & government >
General
|
LSN: |
1-288-69806-2 |
Barcode: |
9781288698066 |
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