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Endogenous Exchange Rate Pass-Through When Nominal Prices Are Set in Advance

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  • Devereux, Michael B
  • Engel, Charles M
  • Storgaard, Peter Ejler

Abstract

This Paper develops a model of endogenous exchange rate pass-through within an open economy macroeconomic framework, where both pass-through and the exchange rate are simultaneously determined, and interact with one another. Pass-through is endogenous because firms choose the currency in which they set their export prices. There is a unique equilibrium rate of pass-through under the condition that exchange rate volatility rises as the degree of pass-through falls. We show that the relationship between exchange rate volatility and economic structure may be substantially affected by the presence of endogenous pass-through. Our key results show that pass-through is related to the relative stability of monetary policy. Countries with relatively low volatility of money growth will have relatively low rates of exchange rate pass-through, while countries with relatively high volatility of money growth will have relatively high pass-through rates.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3608.

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Date of creation: Oct 2002
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Handle: RePEc:cpr:ceprdp:3608

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Keywords: exchange rate pass-through; monetary policy; sticky prices;

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References

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