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Intermediate goods trade and exchange rate pass-through

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Author Info

  • Shi, Kang
  • Xu, Juanyi

Abstract

For a small open economy characterized by intermediate goods trade, exchange rate changes affect not only the relative price of domestic consumption goods to foreign consumption goods, but also the relative price of local input to imported intermediate goods in the trade sector. Therefore, the adjustment role of a flexible exchange rate as an efficient mechanism in face of external shocks will be subject to the degree of exchange rate pass-through to both imported consumption goods and intermediate goods. In this paper, we develop a small open economy model with intermediate goods trade to investigate the implication of exchange rate pass-through to input prices for economic dynamics and the desirability of flexible exchange rates. Our model shows that in the presence of either terms of trade shocks or non-traded productivity shocks, the degree of exchange rate pass-through to input prices affects the economy more than does the degree of pass-through to goods prices. Furthermore, we find that, compared with the full exchange rate pass-through case, a delayed pass-through to input prices leads to more welfare loss than does a delayed pass-through to goods prices.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Macroeconomics.

Volume (Year): 32 (2010)
Issue (Month): 2 (June)
Pages: 571-583

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Handle: RePEc:eee:jmacro:v:32:y:2010:i:2:p:571-583

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Web page: http://www.elsevier.com/locate/inca/622617

Related research

Keywords: Intermediate goods trade Exchange rate pass-through to input prices Welfare;

References

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Cited by:
  1. Pierre-Richard Agénor & K. Alper & L. Pereira da Silva, 2012. "Sudden Floods, Prudential Regulation and Stability in an Open Economy," Working Papers Series 267, Central Bank of Brazil, Research Department.
  2. Liao, Wei & Shi, Kang & Zhang, Zhiwei, 2012. "Vertical trade and China's export dynamics," China Economic Review, Elsevier, vol. 23(4), pages 763-775.

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