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Exchange Rate Pass-Through and the Welfare Effects of the Euro

  • Michael B. Devereux

    (University of British Columbia and CEPR)

  • Charles Engel

    (University of Wisconsin and NBER)

  • CÈdric Tille

    (Federal Reserve Bank of New York)

This article explores the implications of the European single currency within a simple sticky price intertemporal model. We focus on the question of how the euro may change the sensitivity of consumer prices in Europe to exchange-rate changes. Our central conjecture is that the acceptance of the euro will lead European prices to become more insulated from exchange-rate volatility. We find that this affects both the volatility and "levels" of macroeconomic aggregates in both the U.S. and Europe. We find that European welfare is enhanced, and the U.S. shares in Europe's good fortune. Copyright 2003 By The Economics Department Of The University Of Pennsylvania And Osaka University Institute Of Social And Economic Research Association

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Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

Volume (Year): 44 (2003)
Issue (Month): 1 (February)
Pages: 223-242

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Handle: RePEc:ier:iecrev:v:44:y:2003:i:1:p:223-242
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  1. Maurice Obstfeld & Giovanni Peri, 1999. "Regional Nonadjustment and Fiscal Policy: Lessons for EMU," NBER Working Papers 6431, National Bureau of Economic Research, Inc.
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  11. Haskel, Jonathan & Wolf, Holger C, 1999. "Why Does the 'Law of One Price' Fail? A Case Study," CEPR Discussion Papers 2187, C.E.P.R. Discussion Papers.
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  14. Eichengreen, Barry, 1990. "Is Europe an Optimum Currency Area?," CEPR Discussion Papers 478, C.E.P.R. Discussion Papers.
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