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Incomplete Pass-through and Exchange Rate Volatility: A Simulation Approach - Pass-through incompleto e volatilità del cambio: un approccio simulato


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  • Tseng, Hui-Kuan

    (The University of North Carolina at Charlotte, Department of Economics)

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    This paper examines the relationship between exchange rate pass-through and exchange rate volatility. Numerical simulation suggests that increased degree of pass-through may be stabilizing or destabilizing the exchange rate, mainly depending on the source of random disturbances. The result is generally insensitive to the income elasticity of aggregate demand, the income elasticity of trade balance and income elasticity of money demand, but it is sensitive to the degree of price flexibility. When domestic absorption disturbance, domestic real income disturbance, or foreign real income disturbance impinges on the economy, an increased degree of pass-through tends to decrease exchange rate volatility when price adjustment is inelastic, but it turns out to be destabilizing if the price adjustment is elastic. / Questo lavoro esamina il rapporto tra il pass-through, ovvero la misura in cui le variazioni dei cambi si ripercuotono sui prezzi dei beni, e la volatilità del cambio. La simulazione numerica suggerisce che un livello maggiore di pass-through può avere un effetto stabilizzante o destabilizzante sul tasso di cambio, ciò dipende prevalentemente dalla fonte dei disturbi casuali. Il risultato generalmente è insensibile all’elasticità – rispetto al reddito – della domanda aggregata, del saldo della bilancia commerciale e della domanda di moneta, ma è sensibile al grado di flessibilità dei prezzi. Quando i disturbi nell’assorbimento interno e nel reddito interno o estero reale influiscono sull’economia, un maggiore pass-through tende a far diminuire la volatilità del cambio – se l’aggiustamento del prezzo è inelastico – mentre se quest’ultimo è elastico il pass-through risulta destabilizzante.

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    Bibliographic Info

    Article provided by Camera di Commercio di Genova in its journal Economia Internazionale / International Economics.

    Volume (Year): 63 (2010)
    Issue (Month): 1 ()
    Pages: 121-135

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    Handle: RePEc:ris:ecoint:0590

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    Keywords: Incomplete Pass-through; Exchange Rate Volatility;

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    1. Corsetti, Giancarlo & Dedola, Luca & Leduc, Sylvain, 2008. "High exchange-rate volatility and low pass-through," Journal of Monetary Economics, Elsevier, Elsevier, vol. 55(6), pages 1113-1128, September.
    2. Giovanni P. Olivei, 2002. "Exchange rates and the prices of manufacturing products imported into the United States," New England Economic Review, Federal Reserve Bank of Boston, Federal Reserve Bank of Boston, issue Q 1, pages 3 - 18.
    3. Obstfeld, Maurice & Rogoff, Kenneth, 1995. "Exchange Rate Dynamics Redux," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 103(3), pages 624-60, June.
    4. Michael B. Devereux & Charles Engel, 2002. "Exchange Rate Pass-Through, Exchange Rate Volatility, and Exchange Rate Disconnect," NBER Working Papers 8858, National Bureau of Economic Research, Inc.
    5. Margarida Duarte & Alan C. Stockman, 2001. "Rational Speculation and Exchange Rates," NBER Working Papers 8362, National Bureau of Economic Research, Inc.
    6. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 84(6), pages 1161-76, December.
    7. Devereux, Michael B & Engel, Charles M & Storgaard, Peter Ejler, 2002. "Endogenous Exchange Rate Pass-Through When Nominal Prices Are Set in Advance," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3608, C.E.P.R. Discussion Papers.
    8. Bergin, Paul R. & Shin, Hyung-Cheol & Tchakarov, Ivan, 2007. "Does exchange rate variability matter for welfare? A quantitative investigation of stabilization policies," European Economic Review, Elsevier, Elsevier, vol. 51(4), pages 1041-1058, May.
    9. Pinelopi K. Goldberg & Michael M. Knetter, 1996. "Goods Prices and Exchange Rates: What Have We Learned?," NBER Working Papers 5862, National Bureau of Economic Research, Inc.
    10. Mario Marazzi & Nathan Sheets & Robert J. Vigfusson & Jon Faust & Joseph Gagnon & Jaime Marquez & Robert F. Martin & Trevor Reeve & John Rogers, 2005. "Exchange rate pass-through to U.S. import prices: some new evidence," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 833, Board of Governors of the Federal Reserve System (U.S.).
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