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Explaining the Exchange Rate Pass-Through in Different Prices

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  • Hamid Faruqee
  • Dalia Hakura
  • Ehsan U. Choudhri

Abstract

This paper examines the performance of different new open economy macroeconomic models in explaining the exchange rate pass-through in a wide range of prices. Quantitative versions of different models are used to derive the dynamic response of various prices to an exchange rate shock. Predicted responses are compared with the evidence based on VAR models to examine how well different models fit the data. The results show that the best-fitting model incorporates a number of features highlighted by different strands of the literature: sticky prices, sticky wages, distribution costs, and a combination of local and producer currency pricing.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 02/224.

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Length: 32
Date of creation: 01 Dec 2002
Date of revision:
Handle: RePEc:imf:imfwpa:02/224

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Keywords: Prices; Exchange rates; exchange rate; exchange rate shock; exchange rate pass; open economy; import prices; export prices; intermediate goods; terms of trade; export price; foreign exchange; exchange rate shocks; import price; price discrimination; exchange rate changes; home currency; real exchange rate; elasticity of substitution; effective exchange rate; exchange rate dynamics; political economy; nominal effective exchange rate; trade costs; producer price index; exchange rate policy; domestic prices; exchange rate regimes; economic cooperation; international trade; exchange rate depreciations; exchange rate volatility; trade effect; exchange rate change; effect of exchange rate changes; real exchange rates; intermediate inputs; imported goods; free entry; volume of trade; flexible exchange rates; real exchange rate dynamics; exchange rate flexibility;

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References

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  2. Obstfeld, Maurice, 2002. "Exchange Rates and Adjustment: Perspectives from the New Open Economy Macroeconomics," CEPR Discussion Papers 3533, C.E.P.R. Discussion Papers.
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  25. Christopher A. Sims & Tao A. Zha, 1998. "Does monetary policy generate recessions?," Working Paper 98-12, Federal Reserve Bank of Atlanta.
  26. Hamid Faruqee, 1995. "Pricing to Market and the Real Exchange Rate," IMF Working Papers 95/12, International Monetary Fund.
  27. Kim, Soyoung & Roubini, Nouriel, 2000. "Exchange rate anomalies in the industrial countries: A solution with a structural VAR approach," Journal of Monetary Economics, Elsevier, vol. 45(3), pages 561-586, June.
  28. William H. Branson & Richard C. Marston, 1989. "Price and Output Adjustment in Japanese Manufacturing," NBER Working Papers 2878, National Bureau of Economic Research, Inc.
  29. Runkle, David E, 1987. "Vector Autoregressions and Reality," Journal of Business & Economic Statistics, American Statistical Association, vol. 5(4), pages 437-42, October.
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  32. Betts, Caroline & Devereux, Michael B., 1996. "The exchange rate in a model of pricing-to-market," European Economic Review, Elsevier, vol. 40(3-5), pages 1007-1021, April.
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