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New Keynesian Exchange Rate Pass-Through

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  • David Cook
  • Woon Gyu Choi

Abstract

Using the theory of optimal local currency pricing, this paper constructs a structural equation to estimate the rate at which foreign producer prices pass through the local currency prices of imported goods in the U.S. This can be viewed as measuring exchange rate pass-through, in line with price stickiness in the New Keynesian Phillips curve literature. We estimate the structural equation using the generalized methods of moments for consistent estimates of exchange rate pass-through. We find that a model with a mix of local currency pricing and producer currency pricing fits the data best. The estimate of price stickiness in import prices is comparable to existing estimates of domestic price stickiness.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 08/213.

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Length: 25
Date of creation: 01 Sep 2008
Date of revision:
Handle: RePEc:imf:imfwpa:08/213

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Related research

Keywords: Producer prices; Exchange rates; Trade models; Economic models; inflation; price inflation; money market; monetary economics; monetary policy; discount rate; relative prices; gdp deflator; monetary stability; monetary fund; inflation rate; discount rates; money supply; inflation dynamics; price level; rational expectations; foreign currency; low inflation; relative price; inflation equation; optimal monetary policy;

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References

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  1. Sbordone, Argia M., 2005. "Do expected future marginal costs drive inflation dynamics?," Journal of Monetary Economics, Elsevier, Elsevier, vol. 52(6), pages 1183-1197, September.
  2. Smets, Frank & Wouters, Raf, 2002. "Openness, imperfect exchange rate pass-through and monetary policy," Working Paper Series, European Central Bank 0128, European Central Bank.
  3. Michael B. Devereux & James Yetman, 2002. "Price Setting and Exhange Rate Pass-Through," Working Papers, Hong Kong Institute for Monetary Research 222002, Hong Kong Institute for Monetary Research.
  4. Froot, Kenneth A & Klemperer, Paul D, 1989. "Exchange Rate Pass-Through When Market Share Matters," American Economic Review, American Economic Association, American Economic Association, vol. 79(4), pages 637-54, September.
  5. Devereux, Michael B. & Engel, Charles & Storgaard, Peter E., 2004. "Endogenous exchange rate pass-through when nominal prices are set in advance," Journal of International Economics, Elsevier, Elsevier, vol. 63(2), pages 263-291, July.
  6. Sbordone, A.M., 1998. "Prices and Unit Labor Costs: a New Test of Price Stickiness," Papers, Stockholm - International Economic Studies 653, Stockholm - International Economic Studies.
  7. Jordi Gali & Mark Gertler, 2000. "Inflation Dynamics: A Structural Econometric Analysis," NBER Working Papers 7551, National Bureau of Economic Research, Inc.
  8. Dornbusch, Rudiger, 1987. "Exchange Rates and Prices," American Economic Review, American Economic Association, American Economic Association, vol. 77(1), pages 93-106, March.
  9. Obstfeld, Maurice & Rogoff, Kenneth S., 1995. "Exchange Rate Dynamics Redux," Scholarly Articles 12491026, Harvard University Department of Economics.
  10. Michael B. Devereux & Charles Engel, 2002. "Exchange Rate Pass-Through, Exchange Rate Volatility, and Exchange Rate Disconnect," NBER Working Papers 8858, National Bureau of Economic Research, Inc.
  11. Mario Marazzi & Nathan Sheets & Robert J. Vigfusson & Jon Faust & Joseph Gagnon & Jaime Marquez & Robert F. Martin & Trevor Reeve & John Rogers, 2005. "Exchange rate pass-through to U.S. import prices: some new evidence," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 833, Board of Governors of the Federal Reserve System (U.S.).
  12. Jordi Galí & Mark Gertler & J. David López-Salido, 2001. "Robustness of the Estimates of the Hybrid New Keynesian Phillips Curve," Working Papers 44, Barcelona Graduate School of Economics.
  13. Campa, José Manuel & González Mìnguez, Jose Manuel, 2004. "Differences in Exchange Rate Pass-Through in the Euro Area," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4389, C.E.P.R. Discussion Papers.
  14. Robert C. Feenstra & Robert E. Lipsey & Haiyan Deng & Alyson C. Ma & Hengyong Mo, 2005. "World Trade Flows: 1962-2000," NBER Working Papers 11040, National Bureau of Economic Research, Inc.
  15. Campa, José Manuel & Goldberg, Linda S, 2004. "Exchange Rate Pass-Through into Import Prices," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4391, C.E.P.R. Discussion Papers.
  16. Betts, Caroline & Devereux, Michael B., 1996. "The exchange rate in a model of pricing-to-market," European Economic Review, Elsevier, Elsevier, vol. 40(3-5), pages 1007-1021, April.
  17. Betts, Caroline & Devereux, Michael B., 2000. "Exchange rate dynamics in a model of pricing-to-market," Journal of International Economics, Elsevier, Elsevier, vol. 50(1), pages 215-244, February.
  18. Hamid Faruqee, 2006. "Exchange Rate Pass-Through in the Euro Area," IMF Staff Papers, Palgrave Macmillan, vol. 53(1), pages 4.
  19. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, Elsevier, vol. 12(3), pages 383-398, September.
  20. Taylor, John B., 2000. "Low inflation, pass-through, and the pricing power of firms," European Economic Review, Elsevier, Elsevier, vol. 44(7), pages 1389-1408, June.
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Cited by:
  1. International Monetary Fund, 2012. "Exchange Rate Pass-Through in Sub-Saharan African Economies and its Determinants," IMF Working Papers 12/141, International Monetary Fund.

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