International Transmission of Monetary Shocks and the Non-neutrality of International Money


Cheng: Monash University, Caulfield Campus, Caulfield East, VIC 3145, Australia. Tel: +61-3-99031566; E-mail: Zhang: IAS and EMS, Wuhan University and CEMA, Central University of Finance and Economics, China. Tel: +86-27-68753125; E-mail:


Monetary shocks and how they are transmitted internationally are investigated in this paper. The paper shows that where a national currency is used as an international medium of exchange, the international money is non-neutral. In particular, an increase in the supply of the international money leads to a transfer of real resources to the international money-issuing country from its trading partner. It also induces an expansion of the nontradable sector in the international money-issuing country, and an expansion of the tradable sector in its trading partner. The real impact of a monetary shock is greater under a fixed exchange rate system than under a flexible exchange rate system.