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The Theory of Exchange Rates and Traded Goods Prices in the Short-Run

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  • Menon, Jayant

    (Asian Development Bank Institute, Asian Development Bank, Office of Regional Economic Integration Asian Development Bank)

Abstract

The volatility displayed by floating exchange rates has revived interest in the relationship between exchange rates and traded goods prices. This paper aims to provide a theory of exchange rates and traded goods prices in the short-run. In particular, it examines how various factors can cause exchange rate pass-through to be incomplete in the short-run hut not in the long-run. These include: (i) menu costs, (ii) the costs of changing supply, (iii) the dynamics of demand response to price changes, (iv) order-delivery lags, (v) forward exchange cover, and (vi) the currency denomination of trade contracts. From a policy perspective, the presence of these factors could account for the often prolonged adjustment of trade balances to exchange rate changes, and the failure of exchange rate volatility to perceptibly affect the volume of international trade flows.

Suggested Citation

  • Menon, Jayant, 1994. "The Theory of Exchange Rates and Traded Goods Prices in the Short-Run," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 47(1), pages 55-68.
    • Handle: RePEc:ris:ecoint:0428
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    Cited by:

    1. Kenny, Geoff & McGettigan, Donal, 1996. "Exchange Rate Pass-Through and Irish Import Prices," Research Technical Papers 6/RT/96, Central Bank of Ireland.
    2. Hahn, Elke, 2003. "Pass-through of external shocks to euro area inflation," Working Paper Series 243, European Central Bank.
    3. Brissimis, Sophocles N. & Kosma, Theodora S., 2007. "Market power and exchange rate pass-through," International Review of Economics & Finance, Elsevier, vol. 16(2), pages 202-222.
    4. Koopmans, Carl & Lieshout, Rogier, 2016. "Airline cost changes: To what extent are they passed through to the passenger?," Journal of Air Transport Management, Elsevier, vol. 53(C), pages 1-11.

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