International macroe.. - Free

300CHAPTER 9. THE NEW INTERNATIONAL MACROECONOMICSˆr t =[²(β − 1) − β] ˆM, (9.186)is negative if ²>1. Now let rt∗ be the real interest rate in the foreigncountry. Then, (1 + rt ∗ )=(Pt ∗ S t )/(Pt+1S ∗ t+1 δ t ), and ˆr t ∗ = Ŝt − [ ˆP ∗ +Ŝ + ˆδ t ]. But you know that ˆP ∗ = ˆM ∗ =0, Ŝ = ˆM, soˆr t∗ =ˆr t + Ŝt.It follows from (9.184) and (9.186) that ˆr t ∗ = 0. The expansion of thedomestic money supply has no effect on the foreign real interest rate.International transmission and co-movements. Since ˆδ t + Ŝ − Ŝt =0,it follows from (9.172) that Ĉt =[²(1 − β)+β] ˆM >0 and from (9.173)that Ĉ∗ t = 0. Under pricing-to-market, there is no international transmissionof money shocks to consumption. Consumption exhibits a lowdegree of co-movement. From (9.181), output exhibits a high-degree ofco-movement, ŷ t =ˆx t = Ĉt =ŷt ∗ =ˆv t ∗ . The monetary shock raises consumptionand output at home. The foreign country experiences higheroutput, less leisure but no change in consumption. As a result, foreignwelfare must decline. Monetary shocks are positively transmittedinternationally with respect to output but are negatively transmittedwith respect to welfare. Expansionary monetary policy under pricingto market retains the ‘beggar-thy-neighbor’ property of depreciationfrom the Mundell—Fleming model.(207-208)⇒The terms of trade. Let P xt be the home country export price indexand P ∗ xt be the foreign country export price indexP xt =P ∗ xt = µZ 1µZ nThehometermsoftradeare,n0[S t q ∗ t (z)] 1−θ dz 1/(1−θ)= n11−θ St q ∗ t ,[q t (z ∗ )/S t ] 1−θ dz ∗ 1/(1−θ)=[(1− n) 11−θ qt ]/S t .P xtτ t = =S t Pxt∗µ 1n 1−θ1 − nS t q ∗ tq t,and in the short run are determined by changes in the nominal exchangerate, ˆτ t = Ŝt. Since money is neutral in the long run, there are no steadystate effects on τ. Recall that in the Redux model, the monetary shock