Monetary policy with incomplete exchange rate pass-through

Arbeitspapier

The central bank's optimal reaction to foreign and domestic shocks is analyzed in an inflation targeting model allowing for incomplete exchange rate pass-through. Limited pass-through is incorporated through nominal rigidities in an aggregate supply-aggregate demand model derived from some microfoundations. Three main results are obtained. First, the results suggest that the interest rate response to foreign shocks is smaller when pass-through is low. Second, the inflation-output variability trade-off becomes more favourable as pass-through decreases. Third, lower pass-through, that is larger nominal rigidity, leads to higher exchange rate volatility. With exogenous nominal price stickiness, part of the required relative price adjustment is provided through larger movements in the endogenously determined exchange rate.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: SSE/EFI Working Paper Series in Economics and Finance ; No. 476

Classification and Topics

• Classification: Wirtschaft ; Monetary Policy ; Central Banks and Their Policies ; Open Economy Macroeconomics
• Subject: Exchange rate pass-through ; exchange rate volatility ; inflation targeting ; monetary policy ; small open economy ; Geldpolitik ; Exchange Rate Pass-Through ; Schock ; Kleines-offenes-Land ; Theorie

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Adolfson, Malin
• Event: Veröffentlichung
• (who): Stockholm School of Economics, The Economic Research Institute (EFI)
• (where): Stockholm
• (when): 2001

Further information

• Handle: http://hdl.handle.net/10419/56253
• Last update: 10.03.2025, 11:44 AM CET