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

  • Michael B. Devereux

    ()

    (University of British Columbia)

  • Charles Engel

    ()

    (University of Wisconsin)

  • Peter E. Storgaard

    ()

    (Danmarks Nationalbank)

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.

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Paper provided by Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences in its series IEHAS Discussion Papers with number 0304.

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Length: 46 pages
Date of creation: May 2003
Date of revision:
Handle: RePEc:has:discpr:0304
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