Results of empirical research have revealed a characteristic hump-shaped effect of monetary policy shocks on output: the effect builds to a peak after several months and then gradually dies out. We analyze, in the context of a new open economy macroeconomics model, factors that imply a hump-shaped effect of a monetary policy shock on output. We find that a hump-shaped effect of output is likely to result if the model features a catching up with the Joneses effect, pricing-to-market behavior of firms, and imperfect international financial market integration.
- Catching up with the Joneses
- international financial markets
- monetary policy