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Macroeconomic Volatility and Exchange Rate Pass-through under Internationalized Production

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Author Info

  • Aurélien Eyquem

    (GATE - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines)

  • Gunes Kamber

    (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, EPEE - Centre d'Etudes des Politiques Economiques - Université d'Evry-Val d'Essonne)

Abstract

This paper shows that internationalized production, modelled as trade in intermediate goods, challenges the standard result according to which exchange rate volatility insulates small open economies from external shocks. Movements of relative prices affect 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 intermediate goods is taken into account. Finally, trade in intermediate goods affects 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 HAL in its series Post-Print with number halshs-00407665.

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Date of creation: 2009
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Handle: RePEc:hal:journl:halshs-00407665

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Related research

Keywords: Small open economy ; internationalized production ; macroeconomic volatility ; exchange rate pass-through;

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