Economics Research Institute Study Paper
Utah State University Department of Economics
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This paper analyzes a two-country general equilibrium model with multiple stages of production and sticky prices. Working through the cross-country input-output relations and endogenous price stickiness, the model generates the observed patterns in international aggregate comovements following monetary shocks. In particular, both output and consumption comove across countries, and output correlation is larger than consumption correlation, as in the data. The model also generates persistent fluctuations of real exchange rates. Thus, vertical international trade plays an important role in propagating monetary shocks in an open economy.
Huang, Kevin X.D. and Liu, Zheng, "Vertical International Trade as a Monetary Transmission Mechanism in an Open Economy" (2000). Economic Research Institute Study Papers. Paper 183.