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Expectations and exchange rate dynamics: A state-dependent pricing approach

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  • Landry, Anthony

Abstract

This paper presents a two-country DSGE model with state-dependent pricing as in Dotsey et al. [Dotsey, M., King, R.G., and Wolman, A.L., 1999. State-dependent pricing and the general equilibrium dynamics of money and output. Quarterly Journal of Economics 114, 655-690] and variable demand elasticity as in Kimball [Kimball, M.S., 1995. The quantitative analytics of the basis neomonetarist model. Journal of Money, Credit, and Banking 27, 1241-1277]. Following a domestic monetary expansion, the model predicts: (i) positive hump-shaped responses of domestic output and consumption, (ii) positive spillover effects on foreign output and consumption, (iii) a high international output correlation relative to consumption correlation, (iv) a delayed increase in domestic and foreign inflation, (v) a delayed nominal exchange rate overshooting, (vi) a deterioration in the terms of trade, and (vii) a J-curve in the trade balance. The model matches the impulse responses from an identified VAR more closely than an otherwise identical model with time-dependent pricing.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 78 (2009)
Issue (Month): 1 (June)
Pages: 60-71

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Handle: RePEc:eee:inecon:v:78:y:2009:i:1:p:60-71

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Web page: http://www.elsevier.com/locate/inca/505552

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Keywords: State-dependent pricing Variable demand elasticity International business cycle transmission Exchange rate dynamics;

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Citations

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Cited by:
  1. Mina Kim, & Deokwoo Nam, & Jian Wang & Jason Wu,, 2013. "International Trade Price Stickiness and Exchange Rate Pass-through in Micro Data: A Case Study on US-China Trade," Working Papers 467, U.S. Bureau of Labor Statistics.
  2. Anthony Landry, 2009. "State-dependent pricing, local-currency pricing, and exchange rate pass-through," Globalization and Monetary Policy Institute Working Paper 39, Federal Reserve Bank of Dallas.
  3. Charles Engel, 2013. "Exchange Rates and Interest Parity," NBER Working Papers 19336, National Bureau of Economic Research, Inc.
  4. Mina Kim & Deokwoo Nam & Jian Wang & Jason Wu, 2013. "International Trade Price Stickiness and Exchange Rate and Pass-Through in Micro Data: A Case Study on US-China Trade," Working Papers 202013, Hong Kong Institute for Monetary Research.
  5. M. Fatih Ekinci, 2013. "Inattentive Consumers and Exchange Rate Volatility," Working Papers 1325, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
  6. Pippenger, John, 2012. "The Fragility of Overshooting," University of California at Santa Barbara, Economics Working Paper Series qt4rd5j98c, Department of Economics, UC Santa Barbara.

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