Monetary policy, foreign welfare, and international firm mobility

Abstract

AbstractIn this paper, we develop a new open economy macroeconomics model that incorporates international relocation of firms. A novel feature of our model is that the international distribution of firms responds to exchange rate movements caused by monetary shocks. This implies that our model generates an international transmission effect that operates through the international relocation of firms. We conclude that when the degree of flexibility in relocation between the two countries is sufficiently high, an expansionary monetary policy can be a “beggar‐thy‐neighbor” policy.