We develop an analytically tractable two-country model that marries a full account of global macroeconomic dynamics to a supply framework based on monopolistic competition and sticky nominal prices. The model offers simple and intuitive predictions about exchange rates and current accounts that sometimes differ sharply from those of either modern flexible-price inter-temporal models or traditional sticky price Keynesian models. Our analysis leads to a novel perspective on international welfare spillovers due to monetary and fiscal policies.
Reprinted from the JOURNAL OF POLITICAL ECONOMY published by the University of Chicago Press, copyright © 1995 by The University of Chicago. All rights reserved. Posted by permission. One copy may be printed for individual use.