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Openness, imperfect exchange rate pass-through and monetary policy

Frank Smets and Raf Wouters ()

No 19, Working Paper Research from National Bank of Belgium

Abstract: This paper analyses the implications of imperfect exchange rate passthrough for optimal monetary policy in a linearised open-economy dynamic general equilibrium model calibrated to euro area data. Imperfect exchange rate pass through is modelled by assuming sticky import price behaviour. The degree of domestic and import price stickiness is estimated by reproducing the empirical identified impulse response of a monetary policy and exchange rate shock conditional on the response of output, net trade and the exchange rate. It is shown that a central bank that wants to minimise the resource costs of staggered price setting will aim at minimising a weighted average of domestic and import price inflation.

Keywords: monetary policy, open economies; exchange rate pass-through (search for similar items in EconPapers)
JEL-codes: E58 F41 (search for similar items in EconPapers)
Date: 2002-03
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Journal Article: Openness, imperfect exchange rate pass-through and monetary policy (2002) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:nbb:reswpp:200203

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