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International Financial Market Integration, Asset Compositions and the Falling Exchange Rate Pass-Through

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  • Buzaushina, Almira
  • Enders, Zeno
  • Hoffmann, Mathias

Abstract

This paper provides an explanation for the observed decline of the exchange rate pass-through into import prices by modeling the effects of financial market integration on the optimal choice of the pricing currency in the context of rigid nominal goods prices. Contrary to previous literature, the interdependence of this choice with the optimal portfolio choice of internationally traded financial assets is explicitly taken into account. In particular, price setters move towards more local-currency pricing while the debt portfolio includes more foreign assets following increased financial integration. Both predictions are in line with novel empirical evidence.

Suggested Citation

  • Buzaushina, Almira & Enders, Zeno & Hoffmann, Mathias, 2014. "International Financial Market Integration, Asset Compositions and the Falling Exchange Rate Pass-Through," Working Papers 0569, University of Heidelberg, Department of Economics.
    • Handle: RePEc:awi:wpaper:0569
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    More about this item

    Keywords

    Exchange rate pass-through; financial integration; portfolio home bias; international price setting;
    All these keywords.

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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