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Nominal Rigidities and Exchange Rate Pass-Through in a Structural Model of a Small Open Economy

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Author Info
Steve Ambler
Ali Dib
Nooman Rebei

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Abstract

The authors analyze exchange rate pass-through in an estimated structural model of a small open economy that incorporates three types of nominal rigidity (wages and the prices of domestically produced and imported goods) and eight different structural shocks. The model is estimated using quarterly data from Canada and the United States. It predicts a remarkably similar dynamic relationship between the nominal exchange rate and prices in response to the different structural shocks: the nominal exchange rate overshoots its long-run level, and changes in the nominal exchange rate are passed through slowly to the domestic price level. The authors show that, although pricing to market (the slow adjustment of the domestic-currency prices of imported goods) is necessary to generate slow pass-through to the prices of imported goods, it is not necessary to generate slow pass-through to the overall price level. Sticky domestic wages also generate slow exchange rate pass-through, even when the prices of imported goods adjust instantaneously to changes in the exchange rate.

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Paper provided by Bank of Canada in its series Working Papers with number 03-29.

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Length: 57 pages
Date of creation: 2003
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Handle: RePEc:bca:bocawp:03-29

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Related research
Keywords: Business fluctuations and cycles; Economic models; Exchange rates; Inflation and prices; International topics;

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Find related papers by JEL classification:
F2 - International Economics - - International Factor Movements and International Business
F31 - International Economics - - International Finance - - - Foreign Exchange
F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Stephen Murchison & Andrew Rennison & Zhenhua Zhu, 2004. "A Structural Small Open-Economy Model for Canada," Working Papers 04-4, Bank of Canada. [Downloadable!]
  2. Chahnez Boudaya, 2005. "The effects of technological innovations on employment : a new explanation," Cahiers de la Maison des Sciences Economiques v05013, Université Panthéon-Sorbonne (Paris 1). [Downloadable!]
  3. Jesper Lindé & Marianne Nessén & Ulf Söderström, 2004. "Monetary Policy in an Estimated Open-Economy Model with Imperfect Pass-Through," Working Papers 263, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University. [Downloadable!]
    Other versions:
  4. Steve Ambler & Ali Dib & Nooman Rebei, 2004. "Optimal Taylor Rules in an Estimated Model of a Small Open Economy," Working Papers 04-36, Bank of Canada. [Downloadable!]
    Other versions:
  5. Hafedh Bouakez & Nooman Rebei, 2005. "Has Exchange Rate Pass-Through Really Declined in Canada?," Working Papers 05-29, Bank of Canada. [Downloadable!]
  6. Elizabeth C. Wakerly & Byron G. Scott & James M. Nason, 2004. "Common trends and common cycles in Canada: who knew so much has been going on?," Working Paper 2004-5, Federal Reserve Bank of Atlanta. [Downloadable!]
    Other versions:
  7. Nooman Rebei, 2004. "Characterization of the Dynamic Effects of Fiscal Shocks in a Small Open Economy," Working Papers 04-41, Bank of Canada. [Downloadable!]
  8. Eva Ortega & Nooman Rebei, 2006. "The Welfare Implications of Inflation versus Price-Level Targeting in a Two-Sector, Small Open Economy," Working Papers 06-12, Bank of Canada. [Downloadable!]
  9. Marcelo Sánchez, 2008. "Oil shocks and endogenous markups - results from an estimated euro area DSGE model," Working Paper Series 860, European Central Bank. [Downloadable!]
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