Beggar-thyself or beggar-thy-neighbour? The welfare effects of monetary policy

Abstract

This paper examines whether monetary expansion is a beggar- thyself or beggar- thy-neighbour policy. Obstfeld and Rogo¤ (1995) show that monetary expansion under producer currency pricing in- creases domestic and foreign overall welfare, in cases where the cross- country substitutability is high. If the cross-country substitutability is low, then monetary expansion is a beggar- thyself policy that re- duces domestic welfare and increases foreign welfare (Corsetti & Pe- senti 2001; Tille 2001). In this paper, we will show that regardless of whether the cross-country substitutability is high or low, monetary expansion is always a beggar-thyself policy in the short run.