Abstract
The seminar will be held in the Visitor Centre at 1.30 pm.
Abstract
This paper fills a gap in the literature regarding strategic interactions of monetary policies between two countries. It develops an open economy model that integrates the supply, demand and foreign exchange channels of monetary policy transmission. The paper shows that when the traded goods are relative substitutes, the two central banks compete over a favorable exchange rate. However, if the home and foreign goods are relative complements, the central banks compete over a favorable interest rate. We find that gains in competitiveness, which are due to a foreign wage increase, disappear when we take account of monetary policy interactions. Furthermore, we find that domestic economic performance improves in foreign central bank conservativeness.
Keywords: Flexible Exchange Rates, Wage Bargaining, Monopolistic Competition.
JEL Classification: E24, E31, E41, E42, E52, E58, F31, F41, F42