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Federal Reserve Bank of San Francisco
Working Paper Series
The adjustment of global external balances: does partial exchange rate pass-through to trade prices matter?
Christopher J. Gust
Sylvain Leduc
Nathan Sheets
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.


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Christopher J. Gust & Sylvain Leduc & Nathan Sheets, The adjustment of global external balances: does partial exchange rate pass-through to trade prices matter?, Federal Reserve Bank of San Francisco, Working Paper Series 2008-16, 2008.
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Keywords: Foreign exchange rates ; Imports - Prices
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