Welfare and public policy: The role of internationalized production

I incorporate internationalized production, whereby firms hire domestic and foreign production factors, into the model of Corsetti and Pesenti (2001). In contrast to their conclusion, I find that an expansionary monetary shock can be beggar-thy-neighbor and a fiscal shock can improve national welfare. The transmission mechanism of public policy here is different from theirs. In particular, a fiscal shock can affect the short-run exchange rate and generate long-run welfare effects even if it is temporary. Results in this article offer another rationale for international retaliation and coordination.