The Role of Consumption Substitutability in the International Transmission of Shocks

39 Pages Posted: 5 Aug 1999

See all articles by Cédric Tille

Cédric Tille

Graduate Institute of International and Development Studies (HEI)

Date Written: March 1999

Abstract

This paper develops a general framework to analyze the welfare consequences of monetary and fiscal shocks in an open economy, focusing on the role of the degree of substitutability between goods produced in different countries. We find that an expansionary shock that would be beneficial in a closed economy can have an adverse "beggar-thyself" effect in the country where it takes place, or an adverse "beggar-thy-neighbor" effect on its neighbor. Such effects depend significantly on the degree of substitutability between goods produced in different countries, as well as the exact nature of the shocks. In addition, a closed economy can be an imperfect approximation of a large open economy when there is little substitutability between goods produced in different countries.

JEL Classification: F41, F42

Suggested Citation

Tille, Cedric, The Role of Consumption Substitutability in the International Transmission of Shocks (March 1999). FRB of New York Staff Report No. 67. Available at SSRN: https://ssrn.com/abstract=163171 or http://dx.doi.org/10.2139/ssrn.163171

Cedric Tille (Contact Author)

Graduate Institute of International and Development Studies (HEI) ( email )

PO Box 136
Geneva, CH-1211
Switzerland

HOME PAGE: http://sites.google.com/site/cedrictilleheid/home

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