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Transmission of nominal exchange rate changes to export prices and trade flows and implications for exchange rate policy

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  • Hoffmann, Mathias
  • Holtemöller, Oliver

Abstract

We discuss how the welfare ranking of fixed and flexible exchange rate regimes in a New Open Economy Macroeconomics model depends on the interplay between the degree of exchange rate pass-through and the elasticity of substitution between home and foreign goods. We identify combinations of these two parameters for which flexible and for which fixed exchange rates are superior with respect to welfare as measured by a representative household's utility level. We estimate the two parameters for six non-EMU European countries (Czech Republic, Hungary, Poland, Slovakia, Sweden, United Kingdom) using a heterogeneous dynamic panel approach. --

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Bibliographic Info

Paper provided by Deutsche Bundesbank, Research Centre in its series Discussion Paper Series 1: Economic Studies with number 2009,21.

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Date of creation: 2009
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Handle: RePEc:zbw:bubdp1:200921

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Keywords: Elasticity of substitution between home and foreign goods; exchange rate pass-through; exchange rate regime choice; expenditure switching effect; heterogeneous dynamic panel; New Open Economy Macroeconomics;

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Cited by:
  1. Mathias Hoffmann & Peter Tillmann, 2011. "International Financial Integration and National Price Levels: The Role of the Exchange Rate Regime," MAGKS Papers on Economics 201133, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  2. Oliver Holtemöller & Götz Zeddies, 2013. "Has the Euro increased international price elasticities?," Empirica, Springer, vol. 40(1), pages 197-214, February.
  3. Mallick, Sushanta & Marques, Helena, 2012. "Pricing to market with trade liberalization: The role of market heterogeneity and product differentiation in India’s exports," Journal of International Money and Finance, Elsevier, vol. 31(2), pages 310-336.

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