A multi-country DSGE model with incomplete Exchange Rate Pass-through: application for the Euro area

Tovonony Razafindrabe

No 2014-6, EconomiX Working Papers from University of Paris Nanterre, EconomiX

Abstract: This paper develops an estimated multi-country open economy dynamic stochastic general equilibrium (DSGE) model with incomplete Exchange Rate Pass-Through (ERPT) for the Euro-area. It is designed to model global international linkages and to assess international transmission of shocks under an endogenous framework and incomplete ERPT assumption. On the one hand, we relax the small open economy framework (SOEF) but derive a canonical representation of the equilibrium conditions to maintain analytical tractability of the complex international transmission mechanism underlying the model. Namely, the model considers economies of different size that are open and endogenously related. On the other hand, in order to take into account international linkages, possible cointegration relationships within domestic variables and between domestic and foreign variables, and the role of common unobserved and observed global factors such as the oil price, we use the Global VAR model to estimate the steady state of observed endogenous variables of the multi-country DSGE model. Namely, steady states are computed as long-horizon forecasts from a reduced-form cointegrating GVAR model. ERPT analysis conducted from the estimated multi-country DSGE model for the Euro-area in relation with its ve main trade partners which are the United Kingdom, the United States, China, Japan and Switzerland yields the following results. First, exchange rate volatility contributes to a large part of import price inflation variation of the Euro-area in contrast to foreign mark-up shocks. Second, deviation from inflation objective of the foreign trade partners contributes to another source of the Euro-area import price variability. Third, nominal rigidity induces a persistent but a lower impact of the exchange rate changes on import inflation.

Keywords: Pass-through; multi-country DSGE; Bayesian estimation; monetary policy. (search for similar items in EconPapers)
JEL-codes: C11 E52 F31 F41 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2014
New Economics Papers: this item is included in nep-dge, nep-eec, nep-int, nep-mac, nep-mon, nep-opm and nep-sog
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Related works:
Journal Article: A multi-country DSGE model with incomplete exchange rate pass-through: An application for the Euro-area (2016)
Working Paper: A multi-country DSGE model with incomplete Exchange Rate Passthrough: application for the Euro area (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:drm:wpaper:2014-6

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