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

Michael Devereux, Charles Engel and Peter E. Storgaard
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Peter E. Storgaard: Danmarks National Bank

No 212002, Working Papers from Hong Kong Institute for Monetary Research

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.

Pages: 34 pages
Date: 2002-11
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Citations: View citations in EconPapers (11)

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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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