The Mutual Amplification Effect of Exchange Rate Volatility and Unresponsive Trade Prices
The volatility of flexible exchange rates greatly exceeds what most analysts anticipated at the advent of generalized floating. The Dornbusch overshooting model accounts for the fact that exchange rates fluctuate more than the underlying fundamentals. This paper presents a model which may help account for why exchange rates have been even more volatile than the overshooting model would suggest, and why trade prices have been so unresponsive in recent years. The paper employs an extended version of the sticky-price monetary model of exchange rates and a simple industrial organization model of import pricing. The combined macro-JO. model shows that exchange rate volatility and unresponsive trade prices can be mutually amplifying.
|Date of creation:||Aug 1988|
|Date of revision:|
|Publication status:||published as "The Mutual Amplification Effect of Unresponsive Trade Prices and Exchange Rate Volatility." Journal of International Financial Markets, Institutions & Money, Vol. 1, No. 2, pp. 1-20, Spring 1991|
|Contact details of provider:|| Postal: |
Web page: http://www.nber.org
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Feinberg, Robert M, 1989. "The Effects of Foreign Exchange Movements on U.S. Domestic Prices," The Review of Economics and Statistics, MIT Press, vol. 71(3), pages 505-11, August.
- Frankel, Jeffrey A. & Meese, Richard, 1987.
"Are Exchange Rates Excessively Variable?,"
Department of Economics, Working Paper Series
qt18n4c5f6, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
- Jeffrey A. Frankel & Richard Meese, 1987. "Are Exchange Rates Excessively Variable?," NBER Working Papers 2249, National Bureau of Economic Research, Inc.
- Jeffrey A. Frankel and Richard Meese., 1987. "Are Exchange Rates Excessively Variable," Economics Working Papers 8738, University of California at Berkeley.
- Baldwin, Richard, 1988.
"Hyteresis in Import Prices: The Beachhead Effect,"
American Economic Review,
American Economic Association, vol. 78(4), pages 773-85, September.
- Klemperer, Paul, 1987. "Markets with Consumer Switching Costs," The Quarterly Journal of Economics, MIT Press, vol. 102(2), pages 375-94, May.
- Froot, Kenneth A. & Ito, Takatoshi, 1989.
"On the consistency of short-run and long-run exchange rate expectations,"
Journal of International Money and Finance,
Elsevier, vol. 8(4), pages 487-510, December.
- Kenneth A. Froot & Takatoshi Ito, 1988. "On the Consistency of Short-run and Long-run Exchange Rate Expectations," NBER Working Papers 2577, National Bureau of Economic Research, Inc.
- Catherine L. Mann, 1986. "Prices, profit margins, and exchange rates," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Jun, pages 366-379.
- Lucas, Robert Jr., 1982. "Interest rates and currency prices in a two-country world," Journal of Monetary Economics, Elsevier, vol. 10(3), pages 335-359.
- Richard Baldwin, 1988. "Some Empirical Evidence on Hysteresis in Aggregate US Import Prices," NBER Working Papers 2483, National Bureau of Economic Research, Inc.
- Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February.
- Arthur M. Okun, 1975. "Inflation: Its Mechanics and Welfare Costs," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 6(2), pages 351-402.
- Stulz, Rene M, 1984. "Currency Preferences, Purchasing Power Risks, and the Determination of Exchange Rates in an Optimizing Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 16(3), pages 302-16, August.
- Paul R. Krugman & Richard E. Baldwin, 1987. "The Persistence of the U.S. Trade Deficit," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 18(1), pages 1-56.
- Froot, Kenneth A & Klemperer, Paul D, 1989.
"Exchange Rate Pass-Through When Market Share Matters,"
American Economic Review,
American Economic Association, vol. 79(4), pages 637-54, September.
- Kenneth A. Froot & Paul Klemperer, 1988. "Exchange Rate Pass-Through When Market Share Matters," NBER Working Papers 2542, National Bureau of Economic Research, Inc.
- Svensson, Lars E. O., 1985. "Currency prices, terms of trade, and interest rates: A general equilibrium asset-pricing cash-in-advance approach," Journal of International Economics, Elsevier, vol. 18(1-2), pages 17-41, February.
- Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
- Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-40, June.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:2677. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.