Working Paper

Home-Product Bias, Capital Mobility, and the Effects of Monetary Policy Shocks in Open Economies


  • Pierdzioch
  • C.
Publication Date

This paper uses a dynamic general equilibrium two-country optimizing model to analyze the consequences of international capital mobility for the effects of monetary policy in open economies. The model shows that the difference between the short-run output effects of monetary policy shocks in a world of high capital mobility and those in a world of low capital mobility decreases if households have a home-product bias in preferences. This result implies that, in contrast to conventional wisdom derived from the textbook Mundell-Fleming model, the empirically observed integration of international financial markets need not result in a significant change in the propagation of monetary policy shocks if households have a strong bias for consuming home products.


JEL Classification
F32, F36, F41

Key Words

  • capital mobility
  • Home-product bias
  • monetary policy