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International financial market integration, asset compositions, and the falling exchange rate pass-through

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  • Buzaushina, Almira
  • Enders, Zeno
  • Hoffmann, Mathias

Abstract

This paper provides an explanation for the observed decline of the exchange rate pass-through into import prices by modeling the effects of financial market integration on the optimal choice of the pricing currency in the context of rigid nominal goods prices. Contrary to previous literature, we take the interdependence of this choice with the optimal portfolio choice of internationally traded financial assets explicitly into account. In particular, price setters move towards more localcurrency pricing and portfolios include more foreign debt assets following increased financial integration. Both predictions are in line with novel empirical evidence.

Suggested Citation

  • Buzaushina, Almira & Enders, Zeno & Hoffmann, Mathias, 2015. "International financial market integration, asset compositions, and the falling exchange rate pass-through," Discussion Papers 17/2015, Deutsche Bundesbank.
    • Handle: RePEc:zbw:bubdps:172015
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    Cited by:

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    3. Yuwan Duan & Yanping Zhao & Jakob Haan, 2020. "Exchange Rate Pass-through in China: A Cost-Push Input-Output Price Model," Open Economies Review, Springer, vol. 31(3), pages 513-528, July.
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    7. Ben Cheikh, Nidhaleddine & Ben Zaied, Younes, 2020. "Revisiting the pass-through of exchange rate in the transition economies: New evidence from new EU member states," Journal of International Money and Finance, Elsevier, vol. 100(C).

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    More about this item

    Keywords

    exchange rate pass-through; financial integration; portfolio home bias; international price setting;
    All these keywords.

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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