Monetary Policy in a Low Pass-Through Environment

By Tommaso Monacelli. Social Science Research Network, 2005

613 citations recorded by the source corpus.

In a dynamic New Keynesian optimizing model, we introduce incomplete exchange rate pass-through on import prices. Three results stand out. First, unlike canonical models with perfect pass-through which emphasize a type of isomorphism, incomplete pass-through renders the analysis of monetary policy of an open economy fundamentally different from the one of a closed economy. Second, productivity-driven deviations from the law of one price assume the interpretation of endogenous cost-push shocks. Third, the optimal commitment policy, relative to discretion, entails a smoothing of the deviations from the law of one price and requires more stable nominal and real exchange rates.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/9f528e69b57f486286c11d83cc6a1baead3f5ed2

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Citations in the corpus

Monetary policy and uncertainty in an empirical small open-economy model (2010, methodology): “The models of Gali and Monacelli (2005) and Monacelli (2003) are respectively characterized by whether or not ~ F;t = 1.”
Monetary Theory and Policy, 2nd Edition (2003, background): “Letting z t denote the flexible-price equilibrium value of a variable zt, Monacelli (2005) showed that with imperfect pass-through, the output gap can be written as”
Currency Misalignments and Optimal Monetary Policy: A Reexamination (2011, neutral): “Monacelli (2005) has considered optimal monetary policy under LCP in a simple small country model.”
A Bayesian Look at New Open Economy Macroeconomics (2005, background): “Our framework extends Monacelli (2005) to a large open economy setting.”
How do governments respond after catastrophes ? natural-disaster shocks and the fiscal stance (2011, neutral): “This set includes all the conventional macroeconomic variables typically included in macro models (see Monacelli (2005), Linde et al (2008), and Adolfson (2001), among others).”
Can Structural Small Open Economy Models Account for the Influence of Foreign Disturbances (2010, methodology): “The analysis is pursued using generalizations of the semi-small open-economy framework proposed by Gali and Monacelli (2005).1 Following Monacelli (2005), we allow for deviations from the law of one price.”
Do Central Banks Respond to Exchange Rate Movements? A Structural Investigation (2007, background): “However, there is overwhelming empirical evidence across countries of a far lower degree of pass through.18 The theoretical model could be modified along the lines in Monacelli (2003), where producers set their prices in terms of consumers’ currency.”
Understanding the flattening Phillips curve (2010, methodology): “A simple way to introduce this in a new-Keynesian framework was developed by Monacelli (2006).”
Dominant Currency Paradigm (2020, neutral): “See Monacelli (2013). Our discussion establishes that, even under these parameter restrictions, the divine coincidence fails under DCP .”