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Bank of Finland Research Discussion Papers, Bank of Finland

No 29/2007:
The international transmission of monetary policy in a dollar pricing model

Juha Tervala ()

Abstract: This paper analyses the international transmission of monetary policy in a case where all export prices are set in US dollars. ‘Dollar pricing’ implies that the international effects of US monetary shocks are different to those of European shocks because of asymmetric exchange rate pass-through to import prices. A dollar pricing model can explain the observed asymmetry in the transmission of monetary policy: US monetary policy affects US output more than European monetary policy affects European output. I also show that the dollar pricing model reintroduces the current account as an important channel through which monetary policy affects welfare in the short run. The paper concludes that under dollar pricing monetary expansion is a beggar-thy-neighbour policy.

Keywords: open economy macroeconomics; monetary policy; international policy transmission; (follow links to similar papers)

JEL-Codes: F30; F41; F42; (follow links to similar papers)

36 pages, December 16, 2007

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This paper is published as:
Tervala, Juha, (2010), 'The international transmission of monetary policy in a dollar pricing model', Open Economies Review, Vol. 21, No. 5, pages 629-654



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