A model about the interaction of the monetary policy in an advanced and an emerging economy

Abstract

A Dynamic Stochastic General Equilibrium model is developed for two open economies (advanced and emerging). A critical distinction between the economies rests on the location of financial frictions: imperfections affect the domestic credit market in the advanced economy, andth e foreign exchange market is subject to frictions in the emerging one. There is also a distinction related to the monetary policy implemented by each Central Bank: the developed economy directs its policy to monitor the condition of its own financial sector, while the emerging economy focus its efforts on regulating the evolution of external payments and the exchange rate.