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The adjustment of global external balances: Does partial exchange-rate pass-through to trade prices matter?

  • Gust, Christopher
  • Leduc, Sylvain
  • Sheets, Nathan

This paper assesses whether partial exchange-rate pass-through to trade prices has important implications for the prospective adjustment of global external imbalances. To address this question, we develop and estimate an open-economy DSGE model in which pass-through is incomplete due to the presence of local currency pricing, distribution services, and a variable demand elasticity that leads to fluctuations in optimal markups. We find that the overall magnitude of trade adjustment is similar in a low and high pass-through environment with more adjustment in a low pass-through world occurring through movements in the terms of trade rather than real trade flows and through a larger response of the exchange rate.

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

Volume (Year): 79 (2009)
Issue (Month): 2 (November)
Pages: 173-185

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Handle: RePEc:eee:inecon:v:79:y:2009:i:2:p:173-185
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505552

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