The effect of real money balances on international monetary policy transmission

This study examines the effect of real money balances on monetary policy in a two-country new Keynesian model. To accomplish this, the nonseparable utility function between consumption and real money balances is considered in the model. We demonstrate how a change in the money aggregate impacts the international spillover of quantitative easing (QE). This paper shows that whether the degree of the nonseparability parameter impacts international monetary policy spillover depends on the presence of zero lower bounds (ZLB) on nominal interest rates. This paper addresses that when the home and foreign countries face the ZLB, a foreign QE shock might cause a beggar-thy-neighbor effect on the home country.