The adjustment of global external balances: does partial exchange rate pass-through to trade prices matter?
Abstract: This paper assesses whether partial exchange rate pass-through to trade prices has important implications for the prospective adjustment of global external imbalances. To address this question, we develop and estimate an open-economy DGE model in which pass-through is incomplete due to the presence of local currency pricing, distribution services, and a variable demand elasticity that leads to fluctuations in optimal markups. We find that the overall magnitude of trade adjustment is similar in a low and high pass-through world with more adjustment in a low pass-world occurring through a larger response of the exchange rate and terms of trade rather than real trade flows.
File(s): File format is application/pdf http://www.frbsf.org/publications/economics/papers/2008/wp08-16bk.pdf
Provider: Federal Reserve Bank of San Francisco
Part of Series: Working Paper Series
Publication Date: 2008