Several empirical studies suggest that exchange rate pass-through has declined in recent years in industrialized countries.
Staff Working Papers
In a recent paper, Chang, Gomes, and Schorfheide (2002) extend the standard real business cycle (RBC) model to allow for a learning-by-doing (LBD) mechanism whereby current labour supply affects future productivity.
Recent empirical evidence suggests that private consumption is crowded-in by government spending. This outcome violates existing macroeconomic theory, according to which the negative wealth effect brought about by a rise in public expenditure should decrease consumption.
Real Exchange Rate Persistence in Dynamic General-Equilibrium Sticky-Price Models: An Analytical CharacterizationThis paper assesses analytically the ability of dynamic general-equilibrium sticky-price models to generate persistent real exchange rate fluctuations. It develops a tractable general-equilibrium model with Calvo-type price stickiness.
This paper studies the persistent effects of monetary shocks on output. Previous empirical literature documents this persistence, but standard general-equilibrium models with sticky prices fail to generate output responses beyond the duration of nominal contracts.
This paper develops and estimates a dynamic general-equilibrium sticky-price model that accounts for real exchange rate persistence.
Bank of Canada Review articles
May 22, 2004 Economists' long-standing interest in the degree to which exchange rate movements are reflected in prices was rekindled in the 1970s by a combination of rising inflation and the adoption of more flexible exchange rate regimes in many industrialized countries. Specifically, there were concerns that a large currency depreciation could degenerate into an inflationary spiral. Such fears were curtailed in the 1980s and early 1990s as industrialized countries began to reduce and stabilize their inflation rates. The low-inflation period most industrialized countries entered approximately a decade ago coincided with significant exchange rate depreciations that had much smaller effects on consumer prices than expected. This led to a belief that the extent to which exchange rate movements are passed through to consumer prices has declined. In this article, the authors examine why pass-through could be incomplete and review empirical estimates to determine whether pass-through has indeed declined, suggesting possible reasons for this decline and discussing the implications for monetary policy.