Endogenous Exchange Rate Pass-Through When Nominal Prices Are Set in Advance

Charles Engel, Michael Devereux and Peter Ejler Storgaard

No 3608, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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: Exchange rate pass-through; Sticky prices; Monetary policy (search for similar items in EconPapers)
JEL-codes: F41 (search for similar items in EconPapers)
Date: 2002-10
New Economics Papers: this item is included in nep-ifn
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Citations: View citations in EconPapers (12)

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Related works:
Journal Article: Endogenous exchange rate pass-through when nominal prices are set in advance (2004)
Working Paper: Endogenous Exchange Rate Pass-through when Nominal Prices are Set in Advance (2003)
Working Paper: Endogenous Exchange Rate Pass-through when Nominal Prices are Set in Advance (2003)
Working Paper: Endogenous Exchange Rate Pass-Through When Nominal Prices are Set in Advance (2002)
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