The Role of Consumption Substitutability in the International Transmission of Shocks

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Staff Reports

The Role of Consumption Substitutability in the International Transmission of Shocks

March 1999 Number 67

JEL classification: F41, F42

Author: Cédric Tille

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.

Available only in PDF PDF

34 pages / 288 kb

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

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