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The adjustment of global external balances: does partial exchange rate pass-through to trade prices matter?

  • Christopher J. Gust
  • Sylvain Leduc
  • Nathan Sheets

This paper assesses whether partial exchange rate pass-through to trade prices has important implications for the prospective adjustment of global external imbalances. To address this question, we develop and estimate an open-economy DGE model in which pass-through is incomplete due to the presence of local currency pricing, distribution services, and a variable demand elasticity that leads to fluctuations in optimal markups. We find that the overall magnitude of trade adjustment is similar in a low and high pass-through world with more adjustment in a low pass-world occurring through a larger response of the exchange rate and terms of trade rather than real trade flows.

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Paper provided by Federal Reserve Bank of San Francisco in its series Working Paper Series with number 2008-16.

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Date of creation: 2008
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Handle: RePEc:fip:fedfwp:2008-16
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