Publication

This paper examines the welfare effects of monetary policy in open economies using a dynamic general equilibrium two-economy model. The authors incorporate one distortion due to monopolistic competition and one due to a consumption externality in the model. The latter implies that households' utility depends upon the level of their consumption relative to the average consumption in the world. The authors show that, depending on the relative magnitude of the monopolistic distortion and the consumption externality, an expansive monetary policy can result in an increase or a decrease of households' welfare.