Macroeconomic Volatility and Exchange Rate Pass-through under Internationalized ProductionReport as inadecuate




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1 GATE - Groupe d-analyse et de théorie économique 2 EPEE - Centre d-Etudes des Politiques Economiques 3 PSE - Paris School of Economics

Abstract : This paper shows that internationalized production, modelled as trade in intermediate goods, challenges the standard result according to which exchange rate volatility insulates small open economies from external shocks. Movements of relative prices affect the economy through an additional channel, denoted as the cost channel. We show that this channel also acts as an automatic stabilizer and that macroeconomic volatility is dramatically reduced when trade in intermediate goods is taken into account. Finally, trade in intermediate goods affects the exchange rate pass-through to consumption prices and may contribute explaining the puzzle described by McCallum & Nelson 2000.

Keywords : Small open economy internationalized production macroeconomic volatility exchange rate pass-through





Author: Aurélien Eyquem - Gunes Kamber -

Source: https://hal.archives-ouvertes.fr/



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