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Exchange-Rate Pass-Through and the Welfare Effects of the Euro

  • Michael Devereux
  • Charles Engel
  • Cedric Tille

This article explores the implications of the European single currency within a simple sticky price intertemporal model. We focus on the question of how the euro may change the sensitivity of consumer prices in Europe to exchange-rate changes. Our central conjecture is that the acceptance of the euro will lead European prices to become more insulated from exchange-rate volatility. We find that this affects both the volatility and "levels" of macroeconomic aggregates in both the U.S. and Europe. We find that European welfare is enhanced, and the U.S. shares in Europe's good fortune. Copyright 2003 By The Economics Department Of The University Of Pennsylvania And Osaka University Institute Of Social And Economic Research Association

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Paper provided by Department of Economics at the University of Washington in its series Discussion Papers in Economics at the University of Washington with number 0034.

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Date of creation: Sep 1999
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Handle: RePEc:fth:washer:0034
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  1. Maurice Obstfeld & Kenneth Rogoff, 2000. "New Directions for Stochastic Open Economy Models," International Finance 0004002, EconWPA.
  2. Charles Engel & John H. Rogers, 1995. "How wide is the border?," International Finance Discussion Papers 498, Board of Governors of the Federal Reserve System (U.S.).
  3. Barry Eichengreen., 1990. "Is Europe an Optimum Currency Area?," Economics Working Papers 90-151, University of California at Berkeley.
  4. Obstfeld, M., 1998. "Risk and Exchange Rate," Papers 193, Princeton, Woodrow Wilson School - Public and International Affairs.
  5. Helpman, Elhanan, 1981. "An Exploration in the Theory of Exchange-Rate Regimes," Scholarly Articles 3445091, Harvard University Department of Economics.
  6. Philippe Bacchetta & Eric van Wincoop, 1998. "Does Exchange Rate Stability Increase Trade and Capital Flows?," Working Papers 98.04, Swiss National Bank, Study Center Gerzensee.
  7. Giancarlo Corsetti & Paolo Pesenti, 2001. "Welfare and Macroeconomic Interdependence," The Quarterly Journal of Economics, Oxford University Press, vol. 116(2), pages 421-445.
  8. Bayoumi, Tamim & Eichengreen, Barry, 1992. "Shocking Aspects of European Monetary Unification," CEPR Discussion Papers 643, C.E.P.R. Discussion Papers.
  9. Alogoskoufis, G. & Portes, R. & Rey, H., 1997. "The Emergence of the Euro as an International Currency," DELTA Working Papers 97-28, DELTA (Ecole normale supérieure).
  10. Maurice Obstfeld & Giovanni Peri, 1999. "Regional Nonadjustment and Fiscal Policy: Lessons for EMU," NBER Working Papers 6431, National Bureau of Economic Research, Inc.
  11. Michael B. Devereux & Charles Engel, 1998. "Fixed vs. Floating Exchange Rates: How Price Setting Affects the Optimal Choice of Exchange-Rate Regime," NBER Working Papers 6867, National Bureau of Economic Research, Inc.
  12. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
  13. Giovannini, Alberto, 1988. "Exchange rates and traded goods prices," Journal of International Economics, Elsevier, vol. 24(1-2), pages 45-68, February.
  14. Haskel, Jonathan & Wolf, Holger C, 1999. "Why Does the 'Law of One Price' Fail? A Case Study," CEPR Discussion Papers 2187, C.E.P.R. Discussion Papers.
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