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Oxford Economic Papers Advance Access originally published online on August 20, 2004
Oxford Economic Papers 2005 57(1):142-156; doi:10.1093/oep/gpf063
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Right arrow E24 - Employment; Unemployment; Wages; Intergenerational Income Distribution
Right arrow E32 - Business Fluctuations; Cycles
Right arrow E52 - Monetary Policy (Targets, Instruments, and Effects)
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© Oxford University Press 2004; All rights reserved

Home-product bias, capital mobility, and macroeconomic volatility

Christian Pierdzioch

Kiel Institute for World Economics, Research Area Financial Markets, Duesternbrooker Weg 120, 24105 Kiel, Germany; e-mail: c.pierdzioch{at}ifw.uni-kiel.de

This paper uses a dynamic general equilibrium two-country optimizing model to analyse the consequences of international capital mobility for macroeconomic volatility. To this end, the dynamic macroeconomic effects of a monetary policy, a fiscal policy, and a labor supply shock are analysed. Simulations are used to analyse the implications of changes in the degree of capital mobility for the propagation of shocks. The simulation results obtained for a bond economy are compared with the simulation results obtained for a complete-market economy. It is shown that allowing for a home-product bias in preferences has a number of interesting implications for the way changes in international capital mobility and in the structure of international financial markets affect how shocks propagate through an open economy.


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