Exchange rate pass-through, monetary policy, and variability of exchange rates
AbstractWe document that contribution of identified US monetary shock to exchange rate variability differs across currencies and is inversely related to the degree of a country’s US dollar exchange rate pass-through into import prices. We explore this empirical pattern under the assumption that each central bank, when choosing its monetary policy, takes into account in which currency its country’s exports and imports are denominated. The choice of imports invoicing currency will affect both the degree of exchange rate pass-through and the monetary policy response. Different shape of monetary policy reaction function will result in different contribution of monetary shocks to the exchange rate dynamics. We illustrate this mechanism using a simple general equilibrium model.
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Bibliographic InfoPaper provided by Center for Economic and Financial Research (CEFIR) in its series Working Papers with number w0178.
Length: 39 pages
Date of creation: May 2012
Date of revision:
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Exchange rate; pass-through; invoicing currency; monetary policy; monetary shocks; variance decomposition;
Find related papers by JEL classification:
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
- F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-10-20 (All new papers)
- NEP-CBA-2012-10-20 (Central Banking)
- NEP-MAC-2012-10-20 (Macroeconomics)
- NEP-MON-2012-10-20 (Monetary Economics)
- NEP-OPM-2012-10-20 (Open Economy Macroeconomics)
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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