The adjustment of global external imbalances
Subtitle: does partial exchange rate pass-through to trade prices matter?
By: Christopher Gust, Nathan Sheets
Contributors: Sheets, Nathan; Board of Governors of the Federal Reserve System (U.S.)
Series: International finance discussion papers -- no. 850; International finance discussion papers (Online) -- no. 850.
Publisher: Federal Reserve Board
Published: 2006
Place of publication: Washington, D.C
Language: eng
Format: [electronic resource] :
Description: "Recent papers have found evidence of a decline in exchange rate pass-through to import prices in the United States and in a number of other industrial countries as well.  This paper examines the implications of a decline in pass-through for the prospective adjustment of global external imbalances.  We find that a decline in pass-through to trade prices may mute the responsiveness of the nominal trade balance to shifts in the exchange rate, but that a decline in pass-through does not shut down nominal adjustment completely.  We also find that the channels of adjustment vary with pass-through.  When pass-through is high, nominal adjustment is driven by moves in trade quantities.  When pass-through is low, nominal adjustment mainly reflects shifts in the terms of trade (i.e., export prices relative to import prices).  Our work employs a forward-looking, optimizing model in which firms set their prices with an eye toward maintaining their competitiveness against other producers; this feature of the model generates a variable desired markup and, hence, exchange rate pass-through that is less than complete"--Federal Reserve Board web site.
Notes: Title from PDF file as viewed on 3/20/2006.

Includes bibliographical references.

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