Price Stability with Imperfect Financial Integration

Benigno, Pierpaolo

doi:10.2139/ssrn.271329

Cited by 219 publications

(382 citation statements)

References 41 publications

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“…We choose the latter, but the results of the paper are unaffected by this modelling choice. As in Benigno (2001), home residents are able to trade two nominal risk‐less bonds denominated in the domestic and foreign currency. These bonds are issued by residents in both countries in order to finance their consumption expenditure.…”

Section: The Modelmentioning

confidence: 99%

“…Home households face a cost (i.e., transaction cost) when they take a position in the foreign bond market. This cost depends on the net foreign asset position of the home economy as in Benigno (2001). Consumer j faces the following budget constraint in each period t : where and are the individual’s holdings of domestic and foreign nominal risk‐less bonds denominated in the local currency, i t is the home country nominal interest rate, and is the foreign country nominal interest rate, S t is the nominal exchange rate expressed as units of domestic currency needed to buy one unit of foreign currency, P t is the consumer price level, and w t is the real wage.…”

Section: The Modelmentioning

confidence: 99%

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International business cycles and the relative price of investment goods

Basu

Thoenissen

2011

Canadian Journal of Economics/Revue Canadienne d'Économique

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Is the relative price of investment goods a good proxy for investment specific technology? We model this relative price in a flexible price international economy with two fundamental shocks, namely, the total factor productivity (TFP) shock and the investment-specific technology (IST) shock. We show that the one-to-one correspondence between the IST shock and the relative price of investment goods breaks down in an international economy because of the short-run correlation between the terms of trade and the relative price of investment goods. The data congruent negative correlation between the investment rate and the relative price of investment goods thus does not necessarily reflect decline in investment frictions (rise in IST), as suggested by many studies. A calibration experiment with the US data demonstrates that such an inverse relation between rate of investment and the relative price of investment goods basically reflects the positive effect of TFP on the terms of trade for a broad range of economies where the home bias in consumption exceeds investment and there is a sizable adjustment cost of investment. JEL classification: E22, E32, F41 Cycles d'affaires internationaux et le prix relatif des biens d'investissement.Est-ce que le prix relatifs des biens d'investissement est un bon indicateur du changement technique fondé sur l'investissement? On construit un modèle du prix relatif des biens d'investissement dans uneéconomie internationaleà prix flexibles soumisà deux chocs fondamentaux : la productivité totale des facteurs (TFP) et le changement technique fondé sur l'investissement (IST). On montre que la correspondance bijective entre le choc IST et les prix relatifs des biens d'investissement disparaît dans uneéconomie internationaleà cause de la corrélationà court terme entre les termes d'échange et les prix We thank Craig Burnside and two anonymous referees for their helpful and insightful comments. We also thank Charles Nolan and the CDMA, Güneş Kamber as well as seminar participants at the Universities of Bonn, Adelaide and Monash. We have also benefitted from presenting this and earlier versions of this paper at the International business cycles 581 relatifs des biens d'investissement. La corrélation négative entre le taux d'investissement et les prix relatifs des biens d'investissement (qu'on retrouve dans les données) ne reflète donc pas nécessairement un déclin dans les frictions d'investissement (accroissement de IST) comme certainesétudes le suggèrent. Un effort de calibrationà l'aide de données américaines montre qu'une telle relation entre le taux d'investissement et le prix relatif des biens d'investissement reflète l'effet positif de la TFP sur les termes d'échange pour un grandéventail d'économies où la préférence pour les produits domestiques est plus grande dans les biens de consommation que dans les biens d'investissement, et qu'il y a donc un ajustement considérable dans le coût de l'investissement.

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Section: The Modelmentioning

confidence: 99%

Section: The Modelmentioning

confidence: 99%

International business cycles and the relative price of investment goods

Basu

Thoenissen

2011

Canadian Journal of Economics/Revue Canadienne d'Économique

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“…The first rule is one whereby the monetary authorities target the inflation rate of non‐traded goods prices (NTP rule), so that μ π n → ∞. This is analogous to the targeting of domestic inflation that is analysed in a number of recent papers (Benigno, 2001). The general rationale for such a rule is that by adjusting the monetary instrument to prevent inflation in non‐traded goods, it eliminates the need for non‐traded goods producers to adjust their prices, so that their inability to change prices quickly becomes irrelevant.…”

Section: Calibration and Solutionmentioning

confidence: 99%

Exchange Rates and Monetary Policy in Emerging Market Economies

Devereux

Lane

2006

The Economic Journal

249

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We compare alternative monetary policies for an emerging market economy that experiences external shocks to interest rates and the terms of trade. Financial frictions magnify volatility but do not affect the ranking of alternative policy rules. In contrast, the degree of exchange rate pass-through is critical for the assessment of monetary rules. With high pass-through, stabilising the exchange rate involves a trade-off between real stability and inflation stability and the best monetary policy rule is to stabilise non-traded goods prices. With delayed pass-through, the trade-off disappears and the best monetary policy rule is CPI price stability. Copyright 2006 Royal Economic Society.

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“…5 5 A previous version of this work, Benigno (2001), was analyzing a model with just one asset traded internationally and using a debt‐elastic interest rate to pin down a unique steady state. That framework can be also generalized to two‐asset trading. …”

mentioning

confidence: 99%

Price Stability with Imperfect Financial Integration

Benigno

2009

J of Money Credit Banking

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221

157

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This paper studies whether the international monetary system can be affected by asymmetries in the cross-country positions in the international financial markets, i.e., the fact that some countries are large debtors while others are creditors. An important channel that is explored is the interaction between international risk sharing and the stabilization role of monetary policy in each country. The main finding is that the welfare costs of incomplete markets and the gains of deviating from a policy of price stability are increasing with the cross-country asymmetries in the initial net international positions and in particular they become nonnegligible when the persistence of the shocks increases (1% of a permanent shift in steady-state consumption, for the welfare costs of incomplete markets, and 0.2%, for the gains of deviating from a policy of price stability). When global imbalances become larger, optimal monetary policy requires an increase in the volatilities of the real returns on assets and in particular of the nominal interest rates, which should happen to be more correlated across countries. Copyright (c) 2009 The Ohio State University.

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Price Stability with Imperfect Financial Integration

Cited by 219 publications

References 41 publications

International business cycles and the relative price of investment goods

International business cycles and the relative price of investment goods

Exchange Rates and Monetary Policy in Emerging Market Economies

Price Stability with Imperfect Financial Integration

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