Abstract:-

The US dollar is the dominant currency for international trade invoicing. Additionally, US dollar bonds have low returns reflecting a liquidity premium over other assets traded internationally. Using these facts in a two-country model with international trade and liquidity we find a striking difference in spillovers of monetary policy emanating from the dominant country as compared to its non-dominant trading partner. While firm entry falls in both countries in response to a contractionary monetary policy in the dominant country, it rises in the dominant country in response to the same shock from the non-dominant country. Interestingly, higher trade integration marginally increases unemployment in the dominant country but reduces it in the other.