Disinflation and exchange-rate pass-through

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    Abstract

    This paper analyzes exchange-rate dynamics following a money-based disinflation under different degrees of exchange-rate pass-through. Using a microfounded dynamic general equilibrium model with imperfect competition and nominal rigidities, it is shown that a monetary slowdown causes an appreciation of the exchange rate and a short-run fall in employment. Varying the degree of pass-through, however, significantly alters the magnitudes of these effects. As the degree of pass-through is reduced, the extent of the short-run appreciation of the exchange rate increases and the short-run impact of the disinflation on employment falls.

    Original languageEnglish
    Pages (from-to)234-256
    Number of pages23
    JournalMacroeconomic Dynamics
    Volume12
    Issue number2
    Early online date25 Jan 2008
    DOIs
    Publication statusPublished - Apr 2008

    Keywords

    • Disinflation
    • Exchange rates
    • Pass-through
    • New open economy
    • Macroeconomics
    • Pricing-to-market
    • Rate dynamics
    • Prices
    • Model

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