Macroeconomic Volatility and Exchange Rate Pass-through under Internationalized Production
AbstractThis 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 InfoPaper provided by HAL in its series Post-Print with number halshs-00407665.
Date of creation: 2009
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Small open economy ; internationalized production ; macroeconomic volatility ; exchange rate pass-through;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-09-11 (All new papers)
- NEP-CBA-2009-09-11 (Central Banking)
- NEP-IFN-2009-09-11 (International Finance)
- NEP-MAC-2009-09-11 (Macroeconomics)
- NEP-OPM-2009-09-11 (Open Economy Macroeconomic)
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