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Endogenous Exchange Rate Pass-Through When Nominal Prices are Set in Advance

  • Michael B. Devereux

    (University of British Columbia
    CEPR)

  • Charles Engel

    (University of Wisconsin)

  • Peter E. Storgaard

    (Danmarks National Bank)

This paper develops a model of endogenous exchange rate pass-through within an open economy macroeconomic framework, where both pass-through 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 Hong Kong Institute for Monetary Research in its series Working Papers with number 212002.

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Length: 34 pages
Date of creation: Nov 2002
Date of revision:
Handle: RePEc:hkm:wpaper:212002
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