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, C - centre d'Etudes des Politiques Economiques de l'université d'Evry - Université d'Evry-Val d'Essonne)
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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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Paper provided by HAL in its series Post-Print with number
halshs-00407665_v1.
Length: Date of creation: 2009 Date of revision: Handle: RePEc:hal:journl:halshs-00407665_v1
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