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Explaining the Exchange Rate Pass-Through in Different Prices

  • Hamid Faruqee
  • Dalia Hakura
  • Ehsan U. Choudhri

This paper examines the performance of different new open economy macroeconomic models in explaining the exchange rate pass-through in a wide range of prices. Quantitative versions of different models are used to derive the dynamic response of various prices to an exchange rate shock. Predicted responses are compared with the evidence based on VAR models to examine how well different models fit the data. The results show that the best-fitting model incorporates a number of features highlighted by different strands of the literature: sticky prices, sticky wages, distribution costs, and a combination of local and producer currency pricing.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 02/224.

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Length: 32
Date of creation: 01 Dec 2002
Date of revision:
Handle: RePEc:imf:imfwpa:02/224
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  19. Charles Engel, 2002. "The Responsiveness of Consumer Prices to Exchange Rates And the Implications for Exchange-Rate Policy: A Survey Of a Few Recent New Open-Economy..," NBER Working Papers 8725, National Bureau of Economic Research, Inc.
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  27. Runkle, David E, 1987. "Vector Autoregressions and Reality," Journal of Business & Economic Statistics, American Statistical Association, vol. 5(4), pages 437-42, October.
  28. Hamid Faruqee, 1995. "Pricing to Market and the Real Exchange Rate," IMF Staff Papers, Palgrave Macmillan, vol. 42(4), pages 855-881, December.
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  32. Kim, Soyoung & Roubini, Nouriel, 2000. "Exchange rate anomalies in the industrial countries: A solution with a structural VAR approach," Journal of Monetary Economics, Elsevier, vol. 45(3), pages 561-586, June.
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