Globalization and Monetary Policy: An Introduction
95 Pages Posted: 20 May 2009
Date Written: April 1, 2008
Greater openness has become an almost universal feature of modern, developed economies. This paper develops a workhorse international model, and explores the role of standard monetary policy rules applied to an open economy. For this purpose, I build a two-country DSGE model with monopolistic competition, sticky prices, and pricing-to-market. I also derive the steady state and a log-linear approximation of the equilibrium conditions. The paper provides a lengthy explanation of the steps required to derive this benchmark model, and a discussion of: (a) how to account for certain well-known anomalies in the international literature, and (b) how to start 'thinking' about monetary policy in this environment.
Keywords: Globalization, Two-Country DSGE, Monetary Policy
JEL Classification: F3, F4
Suggested Citation: Suggested Citation