Incomplete Pass-Through and the Welfare Effects of Exchange Rate Variability

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    Abstract

    This paper considers the implications of incomplete exchange rate pass-through for optimal monetary and exchange rate policy. A two-country model is presented, which allows an explicit derivation of welfare functions in terms of a weighted sum of the second moments of producer prices and the nominal exchange rate. From a single country perspective, the optimal exchange rate variance depends on the degree of pass-through, the size and openness of the economy, the elasticity of labour supply and the volatility of foreign producer prices. Welfare may be decreasing or increasing in the volatility of the exchange rate. (c) 2004 Elsevier B.V. All rights reserved.

    Original languageEnglish
    Pages (from-to)375-399
    Number of pages25
    JournalJournal of International Economics
    Volume65
    Issue number2
    DOIs
    Publication statusPublished - Mar 2005

    Keywords

    • monetary policy
    • welfare
    • pass-through
    • exchange rate variability
    • optimal policy
    • OPTIMAL MONETARY-POLICY
    • MODELS
    • UNCERTAINTY
    • ECONOMIES
    • STABILITY
    • FRAMEWORK
    • PRICES

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