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Macroeconomic Volatility and Exchange Rate Pass-through under Internationalized Production

Author

Listed:
  • Aurélien Eyquem

    (GATE - Groupe d'analyse et de théorie économique - UL2 - Université Lumière - Lyon 2 - ENS LSH - Ecole Normale Supérieure Lettres et Sciences Humaines - CNRS - Centre National de la Recherche Scientifique)

  • Gunes Kamber

    (EPEE - Centre d'Etudes des Politiques Economiques - UEVE - Université d'Évry-Val-d'Essonne, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)

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).

Suggested Citation

  • Aurélien Eyquem & Gunes Kamber, 2009. "Macroeconomic Volatility and Exchange Rate Pass-through under Internationalized Production," Post-Print halshs-00407665, HAL.
    • Handle: RePEc:hal:journl:halshs-00407665
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00407665
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    Keywords

    Small open economy; internationalized production; macroeconomic volatility; exchange rate pass-through;
    All these keywords.

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