NDLI: Implications of Exchange Rate Pass-Through and Nontradable Goods for International Policy Cooperation

Content Provider	Springer Nature Link
Author	Kashiwagi, Masari
Copyright Year	2014
Abstract	This paper investigates the welfare consequences of international policy cooperation by simultaneously introducing the following three elements in a standard two-country general equilibrium model: (i) general degrees of exchange rate pass-through, (ii) nontradable goods and their sector-specific productivity shocks, and (iii) general weights on goods in Cobb–Douglas consumption indices. There are two channels for possible mutual welfare gains from policy cooperation: First, cooperation can compensate for insufficient changes in the terms of trade when the degree of exchange rate pass-through is intermediate. Second, countries can cooperate in reaction to shocks in the nontradable goods sectors. This second channel is revealed by deriving an analytical condition for welfare gains under full pass-through and this condition is characterized by the weights in the consumption indices and the variances of sector-specific productivity shocks. Numerical evaluation demonstrates that when the two countries are symmetric and equal weights on consumption goods are assumed, welfare gains from cooperation increase as symmetric pass-through elasticity increases, which implies that the second channel dominates the first, whose effect on welfare gains is nonmonotonic in pass-through elasticity.
Starting Page	771
Ending Page	795
Page Count	25
File Format	PDF
ISSN	09237992
Journal	Open Economies Review
Volume Number	25
Issue Number	4
e-ISSN	1573708X
Language	English
Publisher	Springer US
Publisher Date	2014-01-23
Publisher Place	Boston
Access Restriction	One Nation One Subscription (ONOS)
Subject Keyword	Monetary policy International cooperation Nominal rigidities Exchange rate pass-through Nontradable goods International Economics Development Economics European Integration Macroeconomics/Monetary Economics Economic Policy Financial Economics
Content Type	Text
Resource Type	Article
Subject	Economics and Econometrics

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