Working Paper: CEPR ID: DP5250
Authors: Ariel Thomas Burstein; Martin Eichenbaum; Srgio 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.
Keywords: devaluations; exchange rate passthrough; sticky prices
JEL Codes: F31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| sticky nontradable goods prices (P22) | decline in the real exchange rate (F31) |
| real shocks (F31) | post-devaluation depreciation (F31) |
| sticky nontradable goods prices (P22) | low inflation rate in the UK (E31) |
| real shocks (F31) | significant changes in the real exchange rate (F31) |
| sticky nontradable goods prices (P22) | low post-devaluation inflation in Korea (E31) |