International transmission of monetary shocks: MFD vs OR

Resumen

I compare two frameworks for the analysis of the international transmission of monetary shocks: the traditional Mundell-Fleming-Dornbusch (MFD) model and the intertemporal and microfounded model launched by Obstfeld-Rogoff (OR). I point out the differences (and similarities) between them and review some extensions of the OR model that have formed what is now called the New Open Economy Macroeconomics. These extensions include different cross-country and within-country substitutability of goods, non-traded goods, home bias in preferences and local currency pricing. I also explore the question of persistence of real effects of monetary shocks and the application of the new framework to the evaluation and design of monetary policy rules.