DISINFLATION AND EXCHANGE-RATE PASS-THROUGH

Ozge Senay

Macroeconomic Dynamics, 2008, vol. 12, issue 2, 234-256

Abstract: This paper analyzes exchange-rate dynamics following a money-based disinflation under different degrees of exchange-rate pass-through. Using a microfounded dynamic general equilibrium model with imperfect competition and nominal rigidities, it is shown that a monetary slowdown causes an appreciation of the exchange rate and a short-run fall in employment. Varying the degree of pass-through, however, significantly alters the magnitudes of these effects. As the degree of pass-through is reduced, the extent of the short-run appreciation of the exchange rate increases and the short-run impact of the disinflation on employment falls.

Date: 2008
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