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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.<strong>International</strong> 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
9.2. PRICING TO MARKET 301caused a nominal depreciation and a deterioration of the terms of trade.Under pricing to market, the monetare shock results in a short-runimprovement in the terms of trade.
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To Shirley, Laurie, and Leslii
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CONTENTSvii11 Balance of Payments C
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2 CHAPTER 1. SOME INSTITUTIONAL BAC
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80 CHAPTER 3. THE MONETARY MODEL3.1
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102 CHAPTER 3. THE MONETARY MODELMo
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104 CHAPTER 3. THE MONETARY MODELwh
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106 CHAPTER 4. THE LUCAS MODEL(76)
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108 CHAPTER 4. THE LUCAS MODELsubje
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110 CHAPTER 4. THE LUCAS MODELeach
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112 CHAPTER 4. THE LUCAS MODELcompl
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120 CHAPTER 4. THE LUCAS MODELn t =
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124 CHAPTER 4. THE LUCAS MODELTable
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126 CHAPTER 4. THE LUCAS MODEL4.5 C
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128 CHAPTER 4. THE LUCAS MODELTable
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130 CHAPTER 4. THE LUCAS MODELdisco
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132 CHAPTER 4. THE LUCAS MODEL1.02A
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134 CHAPTER 4. THE LUCAS MODELAppen
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136 CHAPTER 4. THE LUCAS MODELProbl
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138 CHAPTER 5. INTERNATIONAL REAL B
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162CHAPTER 6. FOREIGN EXCHANGE MARK
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208 CHAPTER 7. THE REAL EXCHANGE RA
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230 CHAPTER 8. THE MUNDELL-FLEMING
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350 CHAPTER 11. BALANCE OF PAYMENTS
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358 AUTHOR INDEXFama, E.F., 161, 16
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Subject IndexAAbsorption, 16, 230AI
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362 SUBJECT INDEXEfficient capital
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364 SUBJECT INDEXMethod of undeterm
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366 SUBJECT INDEXRisk neutrality, 9
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368 SUBJECT INDEXImpulse response a
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