Endogenous Exchange Rate Pass-through when Nominal Prices are Set in Advance
- Topics:
- Financial Regulations
- Tags:
- Exchange Rate,
- Finance,
- Free Trade,
- Investment,
- Pass-through,
- Volatility
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Overview: 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. This show that the relationship between exchange rate volatility and economic structure may be substantially affected by the presence of endogenous pass-through. The 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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Format: PDF | Size: 600KB | Date: Mar 2003 | Pages: 44
