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Endogenous exchange rate pass-through when nominal prices are set in advance

  • Devereux, Michael B.
  • Engel, Charles
  • Storgaard, Peter E.

This paper develops a model of endogenous exchange rate pass through within an open economy macroeconomic framework, where both pass-through and the exchange rate are simultaneously determined, and interact with one another. Pass-through is endogenous because firms choose the currency in which they set their export prices. There is a unique equilibrium rate of pass-through under the condition that exchange rate volatility rises as the degree of pass-through falls. We show that the relationship between exchange rate volatility and economic structure may be substantially affected by the presence of endogenous pass-through. Our key results show that pass-through is related to the relative stability of monetary policy. Countries with relatively low volatility of money growth will have relatively low rates of exchange rate pass-through, while countries with relatively high volatility of money growth will have relatively high pass-through rates.

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Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 63 (2004)
Issue (Month): 2 (July)
Pages: 263-291

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Handle: RePEc:eee:inecon:v:63:y:2004:i:2:p:263-291
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505552

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