Endogenous exchange rate pass-through when nominal prices are set in advance |
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Authors: | Michael B. Devereux Charles Engel Peter E. Storgaard |
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Affiliation: | a Department of Economics, University of British Columbia, Vancouver, BC, Canada, V6T 1Z1 b Centre for Economic Policy and Research, London EC1V 7RR, UK c Department of Economics, University of Wisconsin, 1180 Observatory Drive, Madison, WI 53706-1393, USA d National Bureau of Economic Research, Cambridge, MA 02138, USA e Danmarks Nationalbank, Havnegade 5, DK-1093, Copenhagen, Denmark |
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Abstract: | This paper develops a model of endogenous exchange rate pass-through within an open economy macroeconomic framework, where both pass-through and the exchange rate are simultaneously determined, and interact with one another. Pass-through is endogenous because firms choose the currency in which they set their export prices. There is a unique equilibrium rate of pass-through under the condition that exchange rate volatility rises as the degree of pass-through falls. We show that the relationship between exchange rate volatility and economic structure may be substantially affected by the presence of endogenous pass-through. Our key results show that pass-through is related to the relative stability of monetary policy. Countries with relatively low volatility of money growth will have relatively low rates of exchange rate pass-through, while countries with relatively high volatility of money growth will have relatively high pass-through rates. |
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Keywords: | Exchange rate pass-through Export prices |
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