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Macroeconomic Volatility and Exchange Rate Pass-through under Internationalized Production

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Author Info
Aurélien Eyquem () (University of Lyon, Lyon, F-69003, France; CNRS, UMR 5824, GATE, Ecully, F-69130, France; ENS LSH, Lyon, F-69007, France)
Güneş 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 explain- ing the puzzle described by McCallum & Nelson (2000).

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Publisher 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
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Handle: RePEc:gat:wpaper:0915

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Find related papers by JEL classification:
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C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
D62 - Microeconomics - - Welfare Economics - - - Externalities
J15 - Labor and Demographic Economics - - Demographic Economics - - - Economics of Minorities and Races; Non-labor Discrimination

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This page was last updated on 2009-11-19.

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