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

Buzaushina, Almira; Enders, Zeno; Hoffmann, Mathias

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

Almira Buzaushina, Zeno Enders and Mathias Hoffmann

No 17/2015, Discussion Papers from Deutsche Bundesbank

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.

Keywords: exchange rate pass-through; financial integration; portfolio home bias; international price setting (search for similar items in EconPapers)
JEL-codes: F31 F36 F41 (search for similar items in EconPapers)
Date: 2015
New Economics Papers: this item is included in nep-mon and nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bubdps:172015

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