Abstract
Abstract This research mainly investigates how merchanting trades influence the monetary policy and analyzes the theory of the monetary policy. There are two features in the theoretical model- imperfectly competitive market and nominal rigidity. To analyze the monetary of the small country, we consider the related shocks from other small countries. There are two main parts. The first part is data reorganization, and we collect data related to merchanting trades and summarize features of merchanting trades in the country. The second part is to derive the theoretical model, we construct a theoretical model and discuss how the monetary policy influence merchanting trades in a small open economy by arranging the related data. Referring to Chu (2012), we modify some settings and divide firms into who are engaged in merchanting trades and who are engaged in intermediate goods. We can obtain the closed-form solution. Subsequently, we infer if the central bank responds to exogenous shocks by conducting monetary policies, the effect will be offseted by exchange rate fluctuation. Therefore, it is not obvious by conducting monetary policies in a country engaging in merchanting trades. Differing from Chu(2012) which is not any the closed-form solutions, we conduct the comparative static analysis, and investigate how changes of exogenous variables influence consumption and employment as well.