Pricing behavior and the role of trade openness in the transmission of monetary shocks

Povoledo, Laura

Abstract

© 2018 The empirical evidence on the role of trade openness in the monetary transmission is not conclusive: some studies find that it increases the sensitivity of output to monetary shocks, others find that it does not. Using a New Keynesian open economy model, I show that the role of trade openness in the transmission of monetary shocks can be reversed completely by the degree of exchange-rate pass-through into import prices. If the pass-through is complete, traded output increases more than nontraded output after a positive monetary shock, if the pass-through is zero, traded output increases less. Moreover, ignoring sectoral heterogeneity in price rigidity leads to an incorrect assessment of the role of trade openness in the transmission of monetary shocks.

Citation

Povoledo, L. (2018). Pricing behavior and the role of trade openness in the transmission of monetary shocks. Journal of Macroeconomics, 57, 231-247. https://doi.org/10.1016/j.jmacro.2018.06.004

• Journal Article Type: Article
• Acceptance Date: Jun 11, 2018
• Online Publication Date: Jun 15, 2018
• Publication Date: Sep 1, 2018
• Deposit Date: Dec 14, 2016
• Publicly Available Date: Dec 14, 2016
• Journal: Journal of Macroeconomics
• Print ISSN: 0164-0704
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 57
• Pages: 231-247
• DOI: https://doi.org/10.1016/j.jmacro.2018.06.004
• Keywords: monetary transmission, traded and nontraded output, exchange rate pass-through, openness, sectoral disaggregation
• Public URL: https://uwe-repository.worktribe.com/output/861869
• Publisher URL: https://doi.org/10.1016/j.jmacro.2018.06.004