Economic Development, Exchange Rates, and the Structure of Trade

István Kónya

No 514, CERS-IE WORKING PAPERS from Institute of Economics, Centre for Economic and Regional Studies

Abstract: The paper builds a two-country open economy model of incomplete exchange rate pass-through. The paper contributes to the existing literature in two ways. First, incomplete pass-through is the result of price discrimination, and not any assumption about price rigidities. The flexible-price model is capable of delivering empirically plausible magnitudes of pass-through, as long as the exchange rate shock is temporary and not very persistent. Second, the model is also used to shed light on the empirically observed differences in exchange rate pass-through between developing and developed countries. In particular, the discrepancy is explained by the different composition of consumption and trade patterns of rich and poor countries - an assumption to which some empirical support is also presented.

Keywords: Exchange rate pass-through; Economic development; International trade (search for similar items in EconPapers)
JEL-codes: F12 F31 F41 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2005
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Persistent link: https://EconPapers.repec.org/RePEc:has:discpr:0514

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