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High exchange-rate volatility and low pass-through

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Author Info

  • Corsetti, Giancarlo
  • Dedola, Luca
  • Leduc, Sylvain

Abstract

Two specifications of an open-economy model are shown to generate high exchange-rate volatility and low exchange-rate pass-through (ERPT). In the model, price discrimination causes ERPT to be incomplete in both the short and the long run. In the short run, a small amount of nominal rigidities is enough to reduce ERPT sharply; still, exchange-rate depreciation worsens the terms of trade, consistent with the evidence. Possible biases from omitted variables and measurement error in the ERPT empirical literature (due to data limitations) are investigated using model-generated time series. Estimates of ERPT coefficients can be quite different from true parameters, and are sensitive to the shocks driving the economies. Estimates can nonetheless detect key structural features of the models.

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Bibliographic Info

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

Volume (Year): 55 (2008)
Issue (Month): 6 (September)
Pages: 1113-1128

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Handle: RePEc:eee:moneco:v:55:y:2008:i:6:p:1113-1128

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Web page: http://www.elsevier.com/locate/inca/505566

Related research

Keywords: DSGE models International business cycle Purchasing-power parity puzzle;

References

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