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Modeling Exchange-Rate Passthrough After Large Devaluations

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  • Ariel Burstein
  • Martin Eichenbaum
  • Sergio Rebelo

Abstract

Large devaluations are generally associated with large declines in real exchange rates. We develop a model which embodies two complementary forces that account for the large declines in the real exchange rate that occur in the aftermath of large devaluations. The first force is sticky nontradable-goods prices. The second force is the impact of real shocks that often accompany large devaluations. We argue that sticky nontradable goods prices generally play an important role in explaining post-devaluation movements in real exchange rates. However, real shocks can sometimes be primary drivers of real exchange-rate movements.

Suggested Citation

  • Ariel Burstein & Martin Eichenbaum & Sergio Rebelo, 2005. "Modeling Exchange-Rate Passthrough After Large Devaluations," NBER Working Papers 11638, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:11638 Note: EFG IFM
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    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange

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