The Relationship between the Law of One Price and Exchange Rate Pass-through
The volatility in exchange rates has brought to the forefront the relationship between exchange rate movements and the prices of traded goods. A vast body of literature examining this important issue exists separately under two general headings, namely tests of the “law of one price” and “exchange rate pass-through” analysis. So far, there has not been any attempt to understand the relationship between the two. This is a serious omission, since it leaves a number of important questions unanswered. This paper clarifies these issues by deriving two fundamental propositions on the inter-relationships between exchange rate pass-through and the law of one price. It also draws out the implications of these inter-relationships for the study of exchange rates and prices, and for policy.
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Volume (Year): 48 (1995)
Issue (Month): 4 ()
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