Beggar-thyself or beggar-thy-neighbour? The welfare effects of monetary policy

This paper examines whether monetary expansion is a beggar-thyself or beggar-thy-neighbour policy. Obstfeld and Rogoff (1995) show that monetary expansion under producer currency pricing increases domestic and foreign overall welfare, in cases where the cross-country substitutability is high. If the...

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Bibliographic Details
Published in:Economic modelling 2011-07, Vol.28 (4), p.2034-2040
Main Authors: Engler, Philipp, Tervala, Juha
Format: Article
Language:English
Subjects:
Beggar-thy-neighbour
Beggar-thyself
Currencies
Domestic policy
Foreign exchange rates
Foreign trade
Monetary policy
Monetary theory
Open economy macroeconomics
Open economy macroeconomics Monetary policy Beggar-thyself Beggar-thy-neighbour
Studies
Welfare
Welfare economics
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Summary:This paper examines whether monetary expansion is a beggar-thyself or beggar-thy-neighbour policy. Obstfeld and Rogoff (1995) show that monetary expansion under producer currency pricing increases domestic and foreign overall welfare, in cases where the cross-country substitutability is high. If the cross-country substitutability is low, then monetary expansion is a beggar-thyself policy that reduces domestic welfare and increases foreign welfare (Corsetti & Pesenti 2001; Tille 2001). In this paper, we will show that regardless of whether the cross-country substitutability is high or low, monetary expansion is always a beggar-thyself policy in the short run. ► We examine whether monetary expansion increases or decreases domestic and foreign welfare. ► Earlier research showed that the effect on overall welfare depends on the size of the cross-country substitutability. ► We show that in the short run it is always beggar-thyself, regardless of the size of the cross-country substitutability.
ISSN:0264-9993
1873-6122
DOI:10.1016/j.econmod.2011.04.001