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Incomplete Pass-through and Exchange Rate Volatility: A Simulation Approach - Pass-through incompleto e volatilità del cambio: un approccio simulato

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  • Tseng, Hui-Kuan

    () (The University of North Carolina at Charlotte, Department of Economics)

Abstract

This paper examines the relationship between exchange rate pass-through and exchange rate volatility. Numerical simulation suggests that increased degree of pass-through may be stabilizing or destabilizing the exchange rate, mainly depending on the source of random disturbances. The result is generally insensitive to the income elasticity of aggregate demand, the income elasticity of trade balance and income elasticity of money demand, but it is sensitive to the degree of price flexibility. When domestic absorption disturbance, domestic real income disturbance, or foreign real income disturbance impinges on the economy, an increased degree of pass-through tends to decrease exchange rate volatility when price adjustment is inelastic, but it turns out to be destabilizing if the price adjustment is elastic. / Questo lavoro esamina il rapporto tra il pass-through, ovvero la misura in cui le variazioni dei cambi si ripercuotono sui prezzi dei beni, e la volatilità del cambio. La simulazione numerica suggerisce che un livello maggiore di pass-through può avere un effetto stabilizzante o destabilizzante sul tasso di cambio, ciò dipende prevalentemente dalla fonte dei disturbi casuali. Il risultato generalmente è insensibile all’elasticità – rispetto al reddito – della domanda aggregata, del saldo della bilancia commerciale e della domanda di moneta, ma è sensibile al grado di flessibilità dei prezzi. Quando i disturbi nell’assorbimento interno e nel reddito interno o estero reale influiscono sull’economia, un maggiore pass-through tende a far diminuire la volatilità del cambio – se l’aggiustamento del prezzo è inelastico – mentre se quest’ultimo è elastico il pass-through risulta destabilizzante.

Suggested Citation

  • Tseng, Hui-Kuan, 2010. "Incomplete Pass-through and Exchange Rate Volatility: A Simulation Approach - Pass-through incompleto e volatilità del cambio: un approccio simulato," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 63(1), pages 121-135.
  • Handle: RePEc:ris:ecoint:0590
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    References listed on IDEAS

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    1. Corsetti, Giancarlo & Dedola, Luca & Leduc, Sylvain, 2008. "High exchange-rate volatility and low pass-through," Journal of Monetary Economics, Elsevier, vol. 55(6), pages 1113-1128, September.
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    More about this item

    Keywords

    Incomplete Pass-through; Exchange Rate Volatility;

    JEL classification:

    • F17 - International Economics - - Trade - - - Trade Forecasting and Simulation
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications

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