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Seoul Journal of Economics
[ Article ]
Seoul Journal of Economics - Vol. 16, No. 4, pp.423-459
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.

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