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Endogenous Exchange Rate Pass-through when Nominal Prices are Set in Advance

Author

Listed:
  • Michael B. Devereux

    (University of British Columbia)

  • Charles Engel

    (University of Wisconsin)

  • Peter E. Storgaard

    (Danmarks Nationalbank)

Abstract

This paper develops a model of endogenous exchange rate pass-through within an open economy macroeconomic framework, where both passthrough and the exchange rate are simultaneously determined, and interact with one another. Pass-through is endogenous because firms choose the currency in which they set their export prices. There is a unique equilibrium rate of pass-through under the condition that exchange rate volatility rises as the degree of pass-through falls. We show that the relationship between exchange rate volatility and economic structure may be substantially affected by the presence of endogenous pass-through. Our key results show that pass-through is related to the relative stability of monetary policy. Countries with relatively low volatility of money growth will have relatively low rates of exchange rate pass-through, while countries with relatively high volatility of money growth will have relatively high pass-through rates.

Suggested Citation

  • Michael B. Devereux & Charles Engel & Peter E. Storgaard, 2003. "Endogenous Exchange Rate Pass-through when Nominal Prices are Set in Advance," CERS-IE WORKING PAPERS 0304, Institute of Economics, Centre for Economic and Regional Studies.
  • Handle: RePEc:has:discpr:0304
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    References listed on IDEAS

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    JEL classification:

    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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