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Expectations and exchange rate dynamics: A state-dependent pricing approach

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  • Landry, Anthony

Abstract

This paper presents a two-country DSGE model with state-dependent pricing as in Dotsey et al. [Dotsey, M., King, R.G., and Wolman, A.L., 1999. State-dependent pricing and the general equilibrium dynamics of money and output. Quarterly Journal of Economics 114, 655-690] and variable demand elasticity as in Kimball [Kimball, M.S., 1995. The quantitative analytics of the basis neomonetarist model. Journal of Money, Credit, and Banking 27, 1241-1277]. Following a domestic monetary expansion, the model predicts: (i) positive hump-shaped responses of domestic output and consumption, (ii) positive spillover effects on foreign output and consumption, (iii) a high international output correlation relative to consumption correlation, (iv) a delayed increase in domestic and foreign inflation, (v) a delayed nominal exchange rate overshooting, (vi) a deterioration in the terms of trade, and (vii) a J-curve in the trade balance. The model matches the impulse responses from an identified VAR more closely than an otherwise identical model with time-dependent pricing.

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  • Landry, Anthony, 2009. "Expectations and exchange rate dynamics: A state-dependent pricing approach," Journal of International Economics, Elsevier, vol. 78(1), pages 60-71, June.
  • Handle: RePEc:eee:inecon:v:78:y:2009:i:1:p:60-71
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    Cited by:

    1. Kang, Hyunju, 2015. "Currency invoicing and state-dependent pricing," Journal of Macroeconomics, Elsevier, vol. 44(C), pages 50-59.
    2. Mina Kim, & Deokwoo Nam, & Jian Wang & Jason Wu,, 2013. "International Trade Price Stickiness and Exchange Rate Pass-through in Micro Data: A Case Study on US-China Trade," Working Papers 467, U.S. Bureau of Labor Statistics.
    3. Engel, Charles, 2014. "Exchange Rates and Interest Parity," Handbook of International Economics, Elsevier.
    4. Mario Crucini & Anthony Landry & Craig Benedict, 2014. "On what states do prices depend? Answers from Ecuador," 2014 Meeting Papers 722, Society for Economic Dynamics.
    5. Choi, Chi-Young & Choi, Horag, 2016. "The role of two frictions in geographic price dispersion: When market friction meets nominal rigidity," Journal of International Money and Finance, Elsevier, vol. 63(C), pages 1-27.
    6. Landry, Anthony, 2010. "State-dependent pricing, local-currency pricing, and exchange rate pass-through," Journal of Economic Dynamics and Control, Elsevier, vol. 34(10), pages 1859-1871, October.
    7. Mehmet Fatih, Ekinci, 2010. "Inattentive Consumers and Exchange Rate Volatility," MPRA Paper 26472, University Library of Munich, Germany, revised 31 Oct 2010.
    8. Ekinci, Mehmet Fatih, 2017. "Inattentive consumers and international business cycles," Journal of International Money and Finance, Elsevier, vol. 72(C), pages 1-27.
    9. Philippe Jeanfils, 2008. "Imperfect exchange rate pass-through : the role of distribution services and variable demand elasticity," Working Paper Research 135, National Bank of Belgium.
    10. Shuhei Takahashi, 2017. "State Dependency in Price and Wage Setting," International Journal of Central Banking, International Journal of Central Banking, vol. 13(1), pages 151-189, February.
    11. Pippenger, John, 2012. "The Fragility of Overshooting," University of California at Santa Barbara, Economics Working Paper Series qt4rd5j98c, Department of Economics, UC Santa Barbara.
    12. Hyunjoo Ryou & Cristina Terra, 2015. "Exchange Rate Dynamics under Financial Market Frictions," THEMA Working Papers 2015-03, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
    13. Mina Kim & Deokwoo Nam & Jian Wang & Jason Wu, 2013. "International Trade Price Stickiness and Exchange Rate and Pass-Through in Micro Data: A Case Study on US-China Trade," Working Papers 202013, Hong Kong Institute for Monetary Research.

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