Economic Development, Exchange Rates, and the Structure of Trade
AbstractThe paper builds a two-country open economy model of incomplete exchange rate pass-through. The paper contributes to the existing literature in two ways. First, incomplete pass-through is the result of price discrimination, and not any assumption about price rigidities. The flexible-price model is capable of delivering empirically plausible magnitudes of pass-through, as long as the exchange rate shock is temporary and not very persistent. Second, the model is also used to shed light on the empirically observed differences in exchange rate pass-through between developing and developed countries. In particular, the discrepancy is explained by the different composition of consumption and trade patterns of rich and poor countries - an assumption to which some empirical support is also presented.
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Bibliographic InfoPaper provided by Institute of Economics, Hungarian Academy of Sciences in its series IEHAS Discussion Papers with number 0514.
Length: 23 pages
Date of creation: 2005
Date of revision:
Exchange rate pass-through; Economic development; International trade;
Find related papers by JEL classification:
- F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies
- F31 - International Economics - - International Finance - - - Foreign Exchange
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
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