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Low pass-through and high spillovers in NOEM: What does help and what does not

Grégory de Walque, Thomas Lejeune, Ansgar Rannenberg and Raf Wouters ()

No 386, Working Paper Research from National Bank of Belgium

Abstract: This paper jointly analyses two major challenges of the canonical NOEM model: i) combining a relatively important exchange rate pass-through at the border with low pass-through at the consumer level, and ii) generating significant endogenous international business cycle synchronization. These issues have been separately analysed in the literature, with extension of the NOEM with a distribution sector for mitigating the exchange-rate pass-through, and foreign input trade for spillovers. We show that introducing input trade for price-maker firms rehabilitate the model regarding the pass-through disconnect, which is especially helpful to model very open economies, while adding a distribution sector lacks flexibility to do so. Moreover, these two extensions of the canonical model mitigate the expenditure switching effect, with implications in terms of international synchronization.

Keywords: Exchange rate pass-through; International trade in intermediate goods; International correlations; Small open economies. (search for similar items in EconPapers)
JEL-codes: E31 E32 F41 F44 (search for similar items in EconPapers)
Pages: 57 pages
Date: 2020-07
New Economics Papers: this item is included in nep-mac and nep-opm
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Handle: RePEc:nbb:reswpp:202007-386