Production Interdependence and Welfare

41 Pages Posted: 5 Aug 2004

See all articles by Kevin X. D. Huang

Kevin X. D. Huang

Federal Reserve Bank of Philadelphia; Vanderbilt University - College of Arts and Science - Department of Economics

Zheng Liu

Federal Reserve Banks - Federal Reserve Bank of San Francisco

Date Written: May 2004

Abstract

The international welfare effects of a country's monetary policy shocks have been controversial in the literature. While a unilateral monetary expansion increases the production efficiency in each country, it affects terms of trade in favor of one country against another depending on the currencies of price setting. We show that the increased world production interdependence magnifies the efficiency-improvement effect while dampening the terms-of-trade effect. As a consequence, a unilateral monetary expansion can be mutually beneficial and thus Pareto improving regardless of in which currency unit prices are set. In this sense, international monetary policy transmission may not be a source of potential conflict in a world with production interdependence.

Keywords: Stages of Processing, Monopolistic Competition, Local Currency Pricing, Welfare

JEL Classification: E32, F31, F41

Suggested Citation

Huang, Kevin X. D. and Liu, Zheng, Production Interdependence and Welfare (May 2004). ECB Working Paper No. 355; FRB of Kansas City Working Paper No. 04-04. Available at SSRN: https://ssrn.com/abstract=557185

Kevin X. D. Huang (Contact Author)

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Vanderbilt University - College of Arts and Science - Department of Economics ( email )

Box 1819 Station B
Nashville, TN 37235
United States

Zheng Liu

Federal Reserve Banks - Federal Reserve Bank of San Francisco ( email )

101 Market Street
San Francisco, CA 94105
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
45
Abstract Views
648
PlumX Metrics