Optimal monetary policy with endogenous export participation (article)
Cooke, DK
Date: 12 March 2015
Article
Journal
Review of Economic Dynamics
Publisher
Elsevier for Society for Economic Dynamics
Publisher DOI
Abstract
This paper studies optimal monetary policy in an open economy with firm heterogeneity and monopolistic competition. I consider a two-country dynamic general equilibrium model where firms make decisions to enter and exit the domestic and export markets. I show that endogenous export participation creates an incentive for policymakers ...
This paper studies optimal monetary policy in an open economy with firm heterogeneity and monopolistic competition. I consider a two-country dynamic general equilibrium model where firms make decisions to enter and exit the domestic and export markets. I show that endogenous export participation creates an incentive for policymakers to set high interest rates. This leads to high long-run inflation. Firm entry magnifies the welfare cost of inflation generating large gains to international monetary cooperation.
Economics
Faculty of Environment, Science and Economy
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