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Endogenous Exchange-Rate Pass-through and Self-Validating Exchange Rate Regimes

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  • Giancarlo Corsetti
  • Paolo Pesenti

Abstract

A long-standing question in open macroeconomics concerns the choice of currency denomination of nominal prices and contracts. This paper analyzes the interaction between firms’ export pricing and monetary policy, and discusses its potential macroeconomic implications for business cycle synchronization and the choice of an exchange rate regime. In the framework of a highly stylized monetary model, we provide an analytical characterization of the optimal export pricing by imperfectly monopolistic firms subject to nominal rigidities. We show that, when choosing the currency denomination of exports, firms optimize over the covariance between the log of the exchange rate and the inverse of the markup. Intuitively, the currency denomination of exports affects the exposure of firms’ marginal revenue to the shocks moving the exchange rate and demand in the destination markets.

Suggested Citation

  • Giancarlo Corsetti & Paolo Pesenti, 2015. "Endogenous Exchange-Rate Pass-through and Self-Validating Exchange Rate Regimes," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 18(3), pages 62-89, December.
  • Handle: RePEc:chb:bcchec:v:18:y:2015:i:3:p:62-89
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    References listed on IDEAS

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    Cited by:

    1. Giancarlo Corsetti & Meredith Crowley & Lu Han & Huasheng Song, 2018. "Markets and Markups: A New Empirical Framework and Evidence on Exporters from China," Discussion Papers 1803, Centre for Macroeconomics (CFM).
    2. Enders, Almira & Enders, Zeno & Hoffmann, Mathias, 2018. "International financial market integration, asset compositions, and the falling exchange rate pass-through," Journal of International Economics, Elsevier, vol. 110(C), pages 151-175.
    3. Xia, Tian, 2020. "The role of intermediate goods in international monetary cooperation," Journal of International Money and Finance, Elsevier, vol. 100(C).

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