Editorial BoardXML

Seoul Journal of Economics - Vol. 16 , No. 4
[Paper List] [Go to Volume List]

[ Article ]
Seoul Journal of Economics - Vol. 16, No. 4, pp. 423-459
Abbreviation: SJE
ISSN: 1225-0279 (Print)
Print publication date 30 Nov 2003
Received 30 Sep 2003 Revised 23 Aug 2004

Staggered Price Settings, Exchange Rates, and Monetary Policy
Yongseung Jung
Associate Professor, Department of Economics, Kyunghee University, Seoul, 130-701, South Korea, Tel: +82-2-961-0962 (jungys@khu.ac.kr)

JEL Classification: E52, F31

Abstract

This paper examines the effects of monetary policy in an optimizing two-country model in which monopolistically competitive firms set their prices in advance, so that the prices are sticky. The main findings of this paper are that there occurs an instantaneous depreciation of the exchange rates through a countercyclical response of a markup when there is a positive home monetary shock. The paper shows that the sticky price model cannot resolve the forward premium puzzle. The degree of depreciation depends on the degree of price stickiness as real variables become more volatile with stronger price stickiness. Finally, the nominal exchange and real exchange rates move very closely as in data when there is a substantial degree of price rigidity.

Keywords: Coutercyclical markup, Exchange rate, Monetary policy, Monopolistic competition
Acknowledgments

I thank to Mark Bils and Alan Stock-man for helpful comments and conversations. All errors are my own.

References
1. Abel, Andrew. B. “Asset Prices under Habit Formation and Catching up with the Joneses.” American Economic Review Papers and Proceedings 80 (1990): 38-42.
2. Basu, Susanto, and Fernald, J. G. “Constant Returns and Small Markups in US Manufacturing.” Mimeograph, University of Michigan, 1993.
3. Baxter, M., and Crucini, M. J. “Explaining Saving-Investment Correlations.” American Economic Review 83 (No. 2 1993): 416-36.
4. Blanchard, O. J., and Kahn, C. M. “The Solution of Linear Difference Models under Rational Expectations.” Econometrica 48 (No. 5 1980): 1305-11.
5. Blanchard, O. J., and Kiyotaki, N. “Monopolistic Competition and the Effects of Aggregate Demand.” American Economic Review 77 (No. 4 1987): 647-66.
6. Calvo, G. A. “Staggered Prices in a Utility-Maximizing Framework.” Journal of Monetary Economics 12 (No. 3 1983): 383-98.
7. Campbell, John. Y., and Cochrane, John H. “By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior.” Journal of Political Economy 107 (No. 2 1999): 205-51.
8. Caplin, A., and Leathy, J. “Aggregation and Optimization with State Dependent Pricing.” Mimeograph, 1992.
9. Chari, V. V., Kehoe, P. J., and McGrattan, E. R. “Monetary Shocks and Real Exchange Rates in Sticky Price Models of International Business Cycles.” Federal Reserve Bank of Minneapolis Working Paper, 1996.
10. Chirinko, R. S. “Business Fixed Investment Spending: A Critical Survey of Modeling Strategies, Empirical Results and Policy Implications.” Journal of Economic Literature 31 (No. 4 1993): 1875-911.
11. Christiano, L., and Eichenbaum, M. “Liquidity Effects, and the Monetary Transmission Mechanism.” NBER Working Paper 4129, 1992.
12. Clarida, R., and Gali, J. “Sources of Real Exchange Rate Fluctuations: How Important Are Nominal Shocks?” Carnegie- Rochester Conference Series on Public Policy, 1993.
13. Cooley, T. F., and Hansen, G. D. “The Inflation Tax in a Real Business Cycle Model.” American Economic Review 79 (No. 4 1989): 733-48.
14. Dixit, A. K., and Stiglitz, J. E. “Monopolistic Competition and Optimum Product Diversity.” American Economic Review 67 (No. 3 1977): 297-308.
15. Dornbusch, R. “Expectations and Exchange Rate Dynamics.” Journal of Political Economy 84 (No. 6 1976): 1161-76.
16. Eichenbaum, M., and Evans, C. “Some Empirical Evidence on the Effects of Monetary Policy Shocks on the Exchange Rates.” Mimeograph, FRB Chicago, December, 1993.
17. Evans, M., and Lothian, J. “The Response of Exchange Rates to Permanent and Transitory Shocks under Floating Exchange Rates.” Mimeograph, Stern School of Business, April, 1993.
18. Fuerst, T. S. “Liquidity, Loanable Funds and Real Activity.” Journal of Monetary Economics 29 (No. 1 1992): 3-24.
19. Grilli, V., and Roubini, N. “Liquidity and Exchange Rates.” Journal of International Economics 32 (No. 2 1992): 339-52.
20. Hairault, J. O., and Portier, F. “Money, New-Keynesian Macroeconomics and the Business Cycle.” European Economic Review 37 (No. 6 1993): 1533-68.
21. King, R. G., Plosser, C., and Rebelo, S. T. “Production, Growth and Business Cycles: I. The Basic Neoclassical Model.” Journal of Monetary Economics 21 (Nos. 2-3 1988a): 195-232.
22. King, R. G., Plosser, C., and Rebelo, S. T. “Production, Growth and Business Cycles: II. New Directions.” Journal of Monetary Economics 21 (Nos. 2-3 1988b): 309-42.
23. King, R. G., and Watson, M. W. “Money, Prices, Interest Rates and the Business Cycle.” Federal Reserve Bank of Chicago Working Paper, 1995.
24. Lucas, R. E., Jr., and Stokey, N. L. “Money Demand in the United State: A Quantitative Review.” Carnegie-Rochester Conference Series on Public 21 (1980): 137-67.
25. Lucas, R. E., Jr., and Stokey, N. L. “Money and Interest in a Cash-in-Advance Economy.” Econometrica 55 (1987): 491-514.
26. Lucas, R. E. Jr. “Liquidity and Interest Rates.” Journal of Economic Theory 50 (1990): 237-64.
27. Obstfeld, M., and Rogoff, K. “Exchange Rate Dynamics Redux.” Journal of Political Economy 103 (No. 3 1995): 624-60.
28. Obstfeld, M., and Rogoff, K. Foundations of International Macroeconomics. Cambridge: MIT Press, 1996.
29. Rotemberg, J. J. “Prices and Output: An Empirical Analysis Based on a Sticky Price Model.” Mimeograph, MIT, 1994.
30. Rotemberg, J. J., and Woodford, M. “Oligopolistic Pricing and the Effects of Aggregate Demand on Economic Activity.” Journal of Political Economy 100 (No. 5 1992):1153-207.
31. Rotemberg, J. J., and Woodford, M. “Dynamic General Equilibrium Models with Imperfectly Competitive Product Markets.” Mimeograph, 1993.
32. Schlagenhauf, D. E., and Wrase, J. M. “Liquidity and Real Activity in a Simple Open Economy Model.” Mimeograph, Arizona State University, 1993.
33. Stockman, A., and Ohanian, L. E. “Short-Run Independence of Monetary Policy under Pegged Exchange Rates and Effects of Money on Exchange Rates and Interest Rates.” Mimeograph, University of Rochester, 1993.
34. Svensson, Lars, E. O., and Wijnbergen, S. “Excess Capacity, Monopolistic Competition, and International Transmission of Monetary Disturbances.” The Economic Journal 99 (1989): 785-805.
35. Yun, T. “Monetary Business Cycles and Price Setting under Monopolistic Competition.” Mimeograph, University of Chicago, 1994.
 

Editorial Office, Seoul Journal of Economics, Institute of Economic Research, Seoul National University 599 Gwanangno, Gwanak-gu, Seoul 151-746, Korea
Tel: +82-2-880-5434 | Fax: +82-2-888-4454 | E-mail: sje@plaza.snu.ac.kr
Copyright (c) 2020 SJE. All rights reserved.