Abstract
Abstract We present a two-country, heterogeneous-agent model in which changes in a country's monetary policy affect real interest rates, relative prices of traded and nontraded goods, and real exchange rates. Nontransitory real effects of monetary policy stem from legal restrictions in the form of country-specific reserve requirements. Without violating the classical assumptions of individual rationality and flexible prices, the model's implications seem qualitatively consistent with the U.S. experience of the 1980s: a monetary policy tightening leading to a rise in the real interest rate and to an initial rise in the real value of the dollar which is subsequently reversed.
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