Openness, Imperfect Exchange Rate Pass-Through and Monetary Policy

By Frank Smets, Raf Wouters. Social Science Research Network, 2002

542 citations recorded by the source corpus.

This paper analyses the implications of imperfect exchange rate passthrough for optimal monetary policy in a linearised open-economy dynamic general equilibrium model calibrated to euro area data. Imperfect exchange rate pass through is modelled by assuming sticky import price behaviour. The degree of domestic and import price stickiness is estimated by reproducing the empirical identified impulse response of a monetary policy and exchange rate shock conditional on the response of output, net trade and the exchange rate. It is shown that a central bank that wants to minimise the resource costs of staggered price setting will aim at minimising a weighted average of domestic and import price inflation.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/845e7c7d205b4df89d53529def46e44ddfc27372

Citations in the corpus

• The shocks matter: Improving our estimates of exchange rate pass-through (2018, unknown): “Long-run exchange rate pass-through is calculated as the sum of the estimated coefficients on the exchange rate changes for all periods 2 For example, see Smets and Wouters (2002) for a discussion of how pass-through has routinely been modelled in DSGE frameworks used in policy institutions.”
• An Estimated DSGE Model for the German Economy within the Euro Area (2005, unknown): “i=0 (θβ)Λt,i ⎡⎣1 + εt+i εt+i μ 1 Pt+i ¶ −1 εP t+i P̄t − 1+εt+i εP t+i Yt+i( MCnom t+i − P̄t P̄t ) ⎤⎦ = 0 (59)”
• THE REAL-INTEREST-RATE GAP AS AN INFLATION INDICATOR (2003, unknown): “, Smets and Wouters (2002)]. The evidence suggests, however, that the business-cycle frequency dynamics of endogenous variables—the frequency with which the present paper is concerned—are little changed by the introduction of these features [Kollmann (1991), Kim and Kose (2000)]. Second, openness pu”
• Monetary policy and exchange rate overshooting: Dornbusch was right after all* (2009, unknown): “Smets and Wouters (2002) , Linde et al. (2004), Murchison et al. (2004) and Adolfson et al.”
• Bayesian Estimation of an Open Economy DSGE Model with Incomplete Pass-Through (2007, unknown): “We also allow for incomplete exchange rate pass-through in both the import and export sectors by including nominal price rigidities (i.e., local currency price stickiness), following, for example, Smets and Wouters (2002).”
• Forecasting Performance of an Open Economy DSGE Model (2007, unknown): “In order to allow for short-run incomplete exchange rate pass-through to import and export prices we introduce nominal rigidities in the local currency price, following for example Smets and Wouters ( 2002 ).”
• Monetary Policy in a Low Pass-Through Environment (2005, unknown): “…differs from the one of the present paper for it features one-period predetermined prices and hence does not lend itself to the analysis of the dynamic gains from commitment undertaken here.5 Adolfson (2002) and Smets and Wouters (2002) are contributions more in line with the present paper.”
• Bank Loan Supply and Monetary Policy Transmission in Germany: An Assessment Based on Matching Impulse Responses (2006, unknown): “15If ξ is normally distributed, then J has a χ2–distribution with N −m degrees of freedom, where N is the number of observations on the impulse responses and m is the number of coefficients (see e.g. Smets and Wouters (2002)).”