The Adjustment of Global External Balances: Does Partial Exchange Rate Pass-Through to Trade Prices Matter?
Year: 2008
Type: article
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-through world occurring through a larger response of the exchange rate and terms of trade rather than real trade flows.
DOI: 10.24148/wp2008-16
Authors: Federal Reserve Board, Christopher J. Gust, Sylvain Leduc, Federal Reserve Bank of San Francisco, Nathan Sheets, Federal Reserve Board
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: bronze
OpenAlex ID: W4250622152