Welfare effects of monetary policy in an economy with vertical production and trade: An analysis based on the perspective of local currency pricing

By incorporating the factor of firms' asymmetric price setting behavior into the two-country model with vertical production and trade, we analyze how one country's monetary policy affects the welfare of both countries. We show that an expansionary monetary policy has (i) a beggar-thyself effect if the ratio of the non-expanding country's intermediate goods firms that set their export prices in the local currency is significantly low and (ii) a prosper-thy-neighbor effect in our model regardless of the ratio of either country's intermediate goods firms that set their export prices in the local currency.