Working Paper
Keeping Up with the Joneses: Implications for the Welfare Effects of Monetary Policy in Open Economies
A dynamic general equilibrium two-country optimizing model is used to analyze the welfare effects of monetary policy in open economies. The distinguishing feature of the model is that households' preferences feature a keeping up with the Joneses effect. This effect implies that households' utility depends upon the level of their consumption relative to the aggregate level of consumption. The model implies that, depending on the strength of the keeping up with the Joneses effect, an expansive monetary policy can be a beggar-thyself policy. Moreover, the welfare effects of monetary policy are asymmetric across countries.
Key Words
- Consumption externality
- monetary policy
- Welfare effects