Economic Development, Exchange Rates, and the Structure of Trade
The paper builds a two-country open economy model of incomplete exchange rate pass-through. The paper contributes to the existing literature in two ways. First, incomplete pass-through is the result of price discrimination, and not any assumption about price rigidities. The flexible-price model is capable of delivering empirically plausible magnitudes of pass-through, as long as the exchange rate shock is temporary and not very persistent. Second, the model is also used to shed light on the empirically observed differences in exchange rate pass-through between developing and developed countries. In particular, the discrepancy is explained by the different composition of consumption and trade patterns of rich and poor countries - an assumption to which some empirical support is also presented.
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- Michael B. Devereux & Philip Lane, 2001.
"Exchange Rates and Monetary Policy in Emerging Market Economies,"
Trinity Economics Papers
200111, Trinity College Dublin, Department of Economics.
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- Choudhri, Ehsan U. & Hakura, Dalia S., 2006. "Exchange rate pass-through to domestic prices: Does the inflationary environment matter?," Journal of International Money and Finance, Elsevier, vol. 25(4), pages 614-639, June.
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The Review of Economics and Statistics,
MIT Press, vol. 87(4), pages 679-690, November.
- Hafedh Bouakez & Nooman Rebei, 2005. "Has Exchange Rate Pass-Through Really Declined in Canada?," Working Papers 05-29, Bank of Canada.
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