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Asymmetric Exchange Rate Pass-through and Monetary Policy in Open Economy

Author

Listed:
  • Sheng Wang

    () (Economics and Management School, Wuhan University
    Institute for Advanced Study, Wuhan University)

  • Rufei Guo

    () (Department of Economics, Chinese University of Hong Kong)

Abstract

We extend the open economy model of optimal monetary policy to incorporate asymmetric exchange rate pass-through, with a focus on the effect of sticky price on monetary policy transmission and welfare analysis. Under incomplete pass-through in the home country and full pass-through in the foreign country, we find that country-specific productivity shocks have complex effects on optimal monetary policies, which also depend on the elasticity of money demand. In a world Nash equilibrium, foreign monetary policy depends on the degree of home exchange rate pass-through. Asymmetry in exchange rate pass-through leads to asymmetric welfare effects. The welfare level of the home country is higher than that of the foreign country in the Nash equilibrium. However, international cooperation can improve world welfare level.

Suggested Citation

  • Sheng Wang & Rufei Guo, 2016. "Asymmetric Exchange Rate Pass-through and Monetary Policy in Open Economy," Annals of Economics and Finance, Society for AEF, vol. 17(1), pages 33-53, May.
  • Handle: RePEc:cuf:journl:y:2016:v:17:i:1:wangguo
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    References listed on IDEAS

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    More about this item

    Keywords

    Optimal monetary policy; Exchange rate pass-through; Producer-currency pricing; Local-currency pricing;

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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