Exchange Rate and the Price Response in the Czech Republic

Jan Hošek

Chapter 9 in Exchange Rate Policies, Prices and Supply-Side Response, 2001, pp 122-139 from Palgrave Macmillan

Abstract: Abstract In mainstream economic theory, the exchange rate is considered to be a policy tool which may (among others) serve to support the supply-side of the economy and to solve the problems with the current account deficit. Namely, a devaluation makes domestic goods more competitive in foreign markets, thus stimulating domestic production in export-oriented branches, either via higher profits of producers or via higher foreign demand if exports are offered for lower prices (measured in foreign currency). In case producers have temporarily limited production capacity, they may compensate the higher supply to the foreign market by lowering quantities oriented to the domestic market. This will (in the case of non-perfect competition in this market) increase domestic prices of affected commodities. In addition, such devaluation makes imports more expensive (in domestic currency) and the domestic demand is supposed to switch to domestically-produced substitutes. Domestic firms that compete with foreign suppliers in the domestic market face a higher demand for their goods, which enables them to expand production or raise prices or most probably both, thus increasing their profits. As can be clearly seen, the likely positive real supply response of domestic firms will most probably be accompanied by a positive price response, the size of which is negatively correlated with the real supply response. The price increase is limited by zero (when the domestic supply will react purely by real expansion) on the one hand, and on the other hand by the extent to which the domestic currency was depreciated (in a hypothetical case when all traded goods are internationally tradable and domestic producers do not expand real quantities and raise prices only, for example, when they operate at their short-run potential output). In the long run the causality reverses.

Keywords: Exchange Rate; Interest Rate; Price Level; Real Interest Rate; Foreign Currency (search for similar items in EconPapers)
Date: 2001
References: Add references at CitEc
Citations:

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pal:palchp:978-0-230-55453-5_9

Ordering information: This item can be ordered from
http://www.palgrave.com/9780230554535

DOI: 10.1057/9780230554535_9

Access Statistics for this chapter

More chapters in Palgrave Macmillan Books from Palgrave Macmillan
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().