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The role of consumption substitutability in the international transmission of shocks


Abstract: This paper develops a general framework to analyze the welfare consequences of monetary and fiscal shocks in an open economy, focusing on the role of the degree of substitutability between goods produced in different countries. We find that an expansionary shock that would be beneficial in a closed economy can have an adverse \\"beggar-thyself\\" effect in the country where it takes place, or an adverse \\"beggar-thy-neighbor\\" effect on its neighbor. Such effects depend significantly on the degree of substitutability between goods produced in different countries, as well as the exact nature of the shocks. In addition, a closed economy can be an imperfect approximation of a large open economy when there is little substitutability between goods produced in different countries.

Keywords: Marshall-Lerner-Robinson condition; Beggar-thy-Neighbor;

JEL Classification: F42; F41;

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Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Staff Reports

Publication Date: 1999-03-04

Number: 67

Pages: 34 pages

Note: For a published version of this report, see C├ędric Tille, "The Role of Consumption Substitutability in the International Transmission of Shocks," Journal of International Economics53, no.2 (April 2001): 421-4.