EconPapers    
Economics at your fingertips  
 

Input Substitution, Export Pricing, and Exchange Rate Policy

Kang Shi () and Juanyi Xu ()

No 102008, Working Papers from Hong Kong Institute for Monetary Research

Abstract: This paper develops a small open economy model with sticky prices to show why a flexible exchange rate policy is not desirable in East Asian emerging market economies. We argue that weak input substitution between local labor and import intermediates in traded goods production and extensive use of foreign currency in export pricing in these economies can help to explain this puzzle. In the presence of these two trade features, the adjustment role of the exchange rate is inhibited, so even a flexible exchange rate cannot stabilize the real economy in face of external shocks. Instead, due to the high exchange rate pass-through, exchange rate changes will lead to instability in both inflation and production cost. As a result, a fixed exchange rate may dominate a monetary policy rule with high exchange rate flexibility in terms of welfare. In a sense, our finding provides a rationale for the "fear of floating" phenomenon in these economies. That is, "fear of floating" may be central banks' rational reaction when these economies are constrained by the trade features mentioned above.

Keywords: Input Substitution; Export Pricing; Exchange Rate Flexibility; Welfare (search for similar items in EconPapers)
JEL-codes: F3 F4 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-int, nep-mac, nep-mon, nep-opm and nep-sea
Date: 2008-10
References: View references in EconPapers View complete reference list from CitEc
Citations View citations in EconPapers (1) Track citations by RSS feed

Downloads: (external link)
http://www.hkimr.org/uploads/publication/163/ub_full_0_2_179_hkimr-no10_bw.pdf (application/pdf)

Related works:
Journal Article: Input substitution, export pricing, and exchange rate policy (2015) Downloads
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:hkm:wpaper:102008

Access Statistics for this paper

More papers in Working Papers from Hong Kong Institute for Monetary Research Contact information at EDIRC.
Bibliographic data for series maintained by HKIMR ().

 
Page updated 2018-09-23
Handle: RePEc:hkm:wpaper:102008