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The Responsiveness of Consumer Prices to Exchange Rates: A Synthesis of Some New Open Economy Macro Models

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  • Engel, Charles

Abstract

General equilibrium optimizing models with sticky nominal prices allow us to revisit questions about optimal monetary policy in open economies. If nominal prices are set in producers' currencies, appropriate monetary policy can reproduce the allocations under flexible prices. If nominal prices are set in consumers' currencies, stable nominal exchange rates may be desirable. In this case, a nominal exchange rate fixed at the PPP level can have desirable consequences for risk sharing, and nominal exchange rate flexibility cannot deliver optimal relative price changes. However, evidence shows that pass-through may be greater to import prices than to consumer prices. If prices are fixed for consumers, but importer-distributors face pass-through, then monetary policy makers face a trade-off that might require some control of nominal exchange rates, but not purely fixed rates. Copyright 2002 by Blackwell Publishers Ltd and The Victoria University of Manchester

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Bibliographic Info

Article provided by University of Manchester in its journal Manchester School.

Volume (Year): 70 (2002)
Issue (Month): 0 (Supplement)
Pages: 1-15

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Handle: RePEc:bla:manchs:v:70:y:2002:i:0:p:1-15

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Cited by:
  1. Bouakez, Hafedh & Rebei, Nooman, 2008. "Has exchange rate pass-through really declined? Evidence from Canada," Journal of International Economics, Elsevier, vol. 75(2), pages 249-267, July.
  2. Alessandro Flamini, 2004. "Inflation Targeting and Exchange Rate Pass-Through," IHEID Working Papers 04-2004, Economics Section, The Graduate Institute of International Studies.
  3. Shambaugh, Jay, 2008. "A new look at pass-through," Journal of International Money and Finance, Elsevier, vol. 27(4), pages 560-591, June.
  4. Shi, Kang & Xu, Juanyi, 2010. "Intermediate goods trade and exchange rate pass-through," Journal of Macroeconomics, Elsevier, vol. 32(2), pages 571-583, June.
  5. Marjan Petreski, 2012. "Output Volatility and Exchange Rate Considerations Under Inflation Targeting : A Review," International Journal of Economics and Financial Issues, Econjournals, vol. 2(4), pages 528-537.
  6. Alessandro Flamini, 2003. "CPI Inflation Targeting and Exchange Rate Pass-through," Macroeconomics 0306017, EconWPA.
  7. Hafedh Bouakez & Nooman Rebei, 2005. "Has Exchange Rate Pass-Through Really Declined in Canada?," Working Papers 05-29, Bank of Canada.
  8. Kerstin Stahn, 2007. "Has the Export Pricing Behaviour of German Enterprises Changed? Empirical Evidence from German Sectoral Export Prices," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), Justus-Liebig University Giessen, Department of Statistics and Economics, vol. 227(3), pages 295-329, June.
  9. Sushanta Mallick & Helena Marques, 2007. "Pass-through of Exchange Rate and Tariffs into Import Prices of India: Currency Depreciation versus Import Liberalisation," Working Papers 3, Queen Mary, University of London, School of Business and Management, Centre for Globalisation Research.
  10. Eiji Fuji & Jeannine Bailliu, 2004. "Exchange Rate Pass-Through and the Inflation Environment in Industrialized Countries: An Empirical Investigation," Computing in Economics and Finance 2004 135, Society for Computational Economics.
  11. Mendoza Lugo, Omar & Pedauga, Luis Enrique, 2006. "Efecto transferencia (pass-through) del tipo de cambio en los precios de bienes y servicios en Venezuela
    [Exchange rate pass-through on prices of goods and services in Venezuela]
    ," MPRA Paper 14874, University Library of Munich, Germany.

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