Working Paper: NBER ID: w9543
Authors: Michael B. Devereux; Charles Engel; Peter E. Storgaard
Abstract: This paper develops a model of endogenous exchange rate pass through within an open economy macroeconomic framework, where both pass-through and the exchange rate are simultaneously determined, and interact with one another. Pass-through is endogenous because firms choose the currency in which they set their export prices. There is a unique equilibrium rate of pass-through under the condition that exchange rate volatility rises as the degree of pass-through falls. We show that the relationship between exchange rate volatility and economic structure may be substantially affected by the presence of endogenous pass-through. Our key results show that pass-through is related to the relative stability of monetary policy. Countries with relatively low volatility of money growth will have relatively low rates of exchange rate pass-through, while countries with relatively high volatility of money growth will have relatively high pass-through rates.
Keywords: No keywords provided
JEL Codes: F3; F4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| exchange rate volatility (F31) | firms' pricing decisions (L11) |
| firms' pricing decisions (L11) | degree of exchange rate pass-through (F31) |
| exchange rate volatility (F31) | degree of exchange rate pass-through (F31) |
| volatility of money growth (E41) | degree of exchange rate pass-through (F31) |
| monetary policy (E52) | price stability (E31) |
| price stability (E31) | impact of exchange rate fluctuations on consumer prices (F31) |