Macroeconomic Volatility and Exchange Rate Pass-through under Internationalized Production

Aurélien Eyquem and Günes Kamber
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Günes Kamber: PSE, Université de Paris 1 Panthéon-Sorbonne, and EPEE, Université d'Evry Val d'Essonne, France

No 915, Working Papers from Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon

Abstract: This paper shows that internationalized production, modelled as trade in inter- mediate goods, challenges the standard result according to which exchange rate volatility insulates small open economies from external shocks. Movements of relative prices aect the economy through an additional channel, denoted as the cost channel. We show that this channel also acts as an automatic stabilizer and that macroeconomic volatility is dramatically reduced when trade in intermedi- ate goods is taken into account. Finally, trade in intermediate goods aects the exchange rate pass-through to consumption prices and may contribute explaining the puzzle described by McCallum & Nelson (2000).

Keywords: segregation; Schelling; potential function; coordination; tax; vote (search for similar items in EconPapers)
JEL-codes: C63 C72 C73 D62 J15 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2009
New Economics Papers: this item is included in nep-mac and nep-opm
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ftp://ftp.gate.cnrs.fr/RePEc/2009/0915.pdf (application/pdf)

Related works:
Working Paper: Macroeconomic Volatility and Exchange Rate Pass-Through Under Internationalized Production (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:gat:wpaper:0915

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