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Openness, imperfect exchange rate pass-through and monetary policy

Author

Listed:
  • Frank Smets

    () (European Central Bank)

  • Raf Wouters

    () (National Bank of Belgium, Research Department)

Abstract

This paper analyses the implications of imperfect exchange rate passthrough for optimal monetary policy in a linearised open-economy dynamic general equilibrium model calibrated to euro area data. Imperfect exchange rate pass through is modelled by assuming sticky import price behaviour. The degree of domestic and import price stickiness is estimated by reproducing the empirical identified impulse response of a monetary policy and exchange rate shock conditional on the response of output, net trade and the exchange rate. It is shown that a central bank that wants to minimise the resource costs of staggered price setting will aim at minimising a weighted average of domestic and import price inflation.

Suggested Citation

  • Frank Smets & Raf Wouters, 2002. "Openness, imperfect exchange rate pass-through and monetary policy," Working Paper Research 19, National Bank of Belgium.
  • Handle: RePEc:nbb:reswpp:200203
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    Keywords

    monetary policy; open economies; exchange rate pass-through;

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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