Advanced Search
MyIDEAS: Login to save this paper or follow this series

The Responsiveness of Consumer Prices to Exchange Rates And the Implications for Exchange-Rate Policy: A Survey Of a Few Recent New Open-Economy..

Contents:

Author Info

  • Charles Engel

Abstract

The traditional case for flexibility in nominal exchange rates assumes that there is nominal price stickiness that prevents relative prices from adjusting in response to real shocks. When prices are sticky in producers' currencies, nominal exchange rate changes can achieve the relative price change that is required between home and foreign goods. The nominal exchange rate flexibility provides the desired 'expenditure-switching' effect of relative price changes. But if prices are fixed ex ante in consumers' currencies, nominal exchange rate flexibility cannot achieve any relative price adjustment. In fact, nominal exchange rate fluctuations are undesirable because they lead to deviations from the law of one price. So, fixed exchange rates are optimal. The empirical literature appears to support the notion that prices are sticky in consumers' currencies. This paper surveys the approaches taken in the new open economy macroeconomic literature to formalize the role of optimal monetary policy. The survey explores how this literature has dealt with the empirical evidence on pass-through of exchange rate changes to consumer prices.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.nber.org/papers/w8725.pdf
Download Restriction: no

Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8725.

as in new window
Length:
Date of creation: Jan 2002
Date of revision:
Publication status: published as Engel, Charles, 2002. "The Responsiveness of Consumer Prices to Exchange Rates: A Synthesis of Some New Open Economy Macro Models," Manchester School, University of Manchester, vol. 70(0), pages 1-15, Supplemen.
Handle: RePEc:nbr:nberwo:8725

Note: IFM
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Phone: 617-868-3900
Email:
Web page: http://www.nber.org
More information through EDIRC

Related research

Keywords:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Michael Devereux & Charles Engel & Cedric Tille, 1999. "Exchange-Rate Pass-Through and the Welfare Effects of the Euro," Working Papers, University of Washington, Department of Economics 0034, University of Washington, Department of Economics.
  2. Willem H. Buiter, 1999. "The EMU and the NAMU: What is the Case for North American Monetary Union?," Canadian Public Policy, University of Toronto Press, University of Toronto Press, vol. 25(3), pages 285-305, September.
  3. Maurice Obstfeld & Kenneth Rogoff, 1999. "New Directions for Stochastic Open Economy Models," NBER Working Papers 7313, National Bureau of Economic Research, Inc.
  4. Maurice Obstfeld & Kenneth Rogoff, 2003. "Global Implications of Self-Oriented National Monetary Rules," Macroeconomics, EconWPA 0303018, EconWPA.
  5. Charles Engel & John H. Rogers, 1995. "How wide is the border?," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 498, Board of Governors of the Federal Reserve System (U.S.).
  6. Sutherland, Alan, 2002. "Incomplete Pass-Through and the Welfare Effects of Exchange Rate Variability," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3431, C.E.P.R. Discussion Papers.
  7. Engel, C., 1996. "Accounting for U.S. Real Exchange Rate Changes," Working Papers, University of Washington, Department of Economics 96-02, University of Washington, Department of Economics.
  8. Chari, V V & Kehoe, Patrick J & McGrattan, Ellen R, 2002. "Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates?," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 69(3), pages 533-63, July.
  9. 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.
  10. Giancarlo Corsetti & Luca Dedola, 2002. "Macroeconomics of international price discrimination," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 744, Board of Governors of the Federal Reserve System (U.S.).
  11. Charles Engel, 1999. "Local-Currency Pricing and the Choice of Exchange-Rate Regime," Working Papers, University of Washington, Department of Economics 0036, University of Washington, Department of Economics.
  12. Michael B. Devereux & Charles Engel, 1998. "Fixed vs. Floating Exchange Rates: How Price Setting Affects the Optimal Choice of Exchange-Rate Regime," NBER Working Papers 6867, National Bureau of Economic Research, Inc.
  13. Obstfeld, M., 1998. "Risk and Exchange Rate," Papers, Princeton, Woodrow Wilson School - Public and International Affairs 193, Princeton, Woodrow Wilson School - Public and International Affairs.
  14. Obstfeld, Maurice & Rogoff, Kenneth, 1995. "Exchange Rate Dynamics Redux," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 103(3), pages 624-60, June.
  15. Philippe BACCHETTA & Eric VAN WINCOOP, 1999. "Does Exchange Rate Stability Increase Trade and Welfare ?," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP), Université de Lausanne, Faculté des HEC, DEEP 9917, Université de Lausanne, Faculté des HEC, DEEP.
  16. Parsley, David & Wei, Shang-Jin, 2001. "Limiting Currency Volatility to Stimulate Goods Market Integration: a Price-Based Approach," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2958, C.E.P.R. Discussion Papers.
  17. Jeffrey A. Frankel, 1993. "On Exchange Rates," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262061546, December.
  18. Corsetti, Giancarlo & Pesenti, Paolo, 2002. "International Dimensions of Optimal Monetary Policy," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3349, C.E.P.R. Discussion Papers.
  19. McCallum, Bennett T. & Nelson, Edward, 1998. "Nominal Income Targeting in an Open-Economy Optimizing Model," Seminar Papers, Stockholm University, Institute for International Economic Studies 644, Stockholm University, Institute for International Economic Studies.
  20. Bergin, Paul R. & Feenstra, Robert C., 2001. "Pricing-to-market, staggered contracts, and real exchange rate persistence," Journal of International Economics, Elsevier, Elsevier, vol. 54(2), pages 333-359, August.
  21. Maurice Obstfeld & Kenneth Rogoff, 2001. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," International Trade, EconWPA 0012003, EconWPA.
  22. Obstfeld, Maurice & Taylor, Alan M, 1997. "Nonlinear Aspects of Goods-Market Arbitrage and Adjustment: Heckscher's Commodity Points Revisited," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1672, C.E.P.R. Discussion Papers.
  23. Mussa, Michael, 1986. "Nominal exchange rate regimes and the behavior of real exchange rates: Evidence and implications," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 25(1), pages 117-214, January.
  24. David C. Parsley & Shang-Jin Wei, 2000. "Explaining the Border Effect: The Role of Exchange Rate Variability, Shipping Costs, and Geography," NBER Working Papers 7836, National Bureau of Economic Research, Inc.
  25. Lane, Philip R., 2001. "The new open economy macroeconomics: a survey," Journal of International Economics, Elsevier, Elsevier, vol. 54(2), pages 235-266, August.
  26. Charles Engel & John H. Rogers, 1999. "Deviations from Purchasing Power Parity:Causes and Welfare Costs," Discussion Papers in Economics at the University of Washington, Department of Economics at the University of Washington 0038, Department of Economics at the University of Washington.
  27. Maurice Obstfeld, 2001. "International Macroeconomics: Beyond the Mundell-Fleming Model," NBER Working Papers 8369, National Bureau of Economic Research, Inc.
  28. Cedric Tille, 2000. ""Beggar-thy-neighbor" or "beggar-thyself"? the income effect of exchange rate fluctuations," Staff Reports, Federal Reserve Bank of New York 112, Federal Reserve Bank of New York.
  29. Rogers, John H. & Jenkins, Michael, 1995. "Haircuts or hysteresis? Sources of movements in real exchange rates," Journal of International Economics, Elsevier, Elsevier, vol. 38(3-4), pages 339-360, May.
  30. Engel, Charles, 1993. "Real exchange rates and relative prices : An empirical investigation," Journal of Monetary Economics, Elsevier, Elsevier, vol. 32(1), pages 35-50, August.
  31. 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.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:8725. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.