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Macroeconomic Volatility and Exchange Rate Pass-through under Internationalized Production

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  • Aurélien Eyquem

    () (University of Lyon, Lyon, F-69003, France; CNRS, UMR 5824, GATE, Ecully, F-69130, France; ENS LSH, Lyon, F-69007, France)

  • Günes Kamber

    (PSE, Université de Paris 1 Panthéon-Sorbonne, and EPEE, Université d'Evry Val d'Essonne, France)

Abstract

This paper shows that internationalized production, modelled as trade in inter- mediate goods, challenges the standard result according to which exchange rate volatility insulates small open economies from external shocks. Movements of relative prices aect the economy through an additional channel, denoted as the cost channel. We show that this channel also acts as an automatic stabilizer and that macroeconomic volatility is dramatically reduced when trade in intermedi- ate goods is taken into account. Finally, trade in intermediate goods aects the exchange rate pass-through to consumption prices and may contribute explaining the puzzle described by McCallum & Nelson (2000).

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Bibliographic Info

Paper provided by Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure in its series Working Papers with number 0915.

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Length: 23 pages
Date of creation: 2009
Date of revision:
Handle: RePEc:gat:wpaper:0915

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