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Pass-Through and Exchange-Rate Fluctuations in a DSGE Model of Price

  • Sylvain Leduc

    ()

    (International Finance Division Federal Reserve Board)

  • Giancarlo Corsetti
  • Luca Dedola

Two specifications of an open-economy model are shown to generate high exchange-rate volatility and low exchange-rate pass-through (ERPT). In the model, price discrimination causes ERPT to be incomplete in both the short and the long run. In the short run, a small amount of nominal rigidities is enough to reduce ERPT sharply; still, exchange-rate depreciation worsens the terms of trade, consistent with the evidence. Possible biases from omitted variables and measurement error in the ERPT empirical literature (due to data limitations) are investigated using model-generated time series. Estimates of ERPT coefficients can be quite different from true parameters, and are sensitive to the shocks driving the economies. Estimates can nonetheless detect key structural features of the models.

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Paper provided by Society for Economic Dynamics in its series 2005 Meeting Papers with number 381.

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Date of creation: 2005
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Handle: RePEc:red:sed005:381
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

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