Exchange rate dynamics, relative price stickiness, and wealth effects in an optimising model

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Published **1986**
by Research Dept., Central Bank of Ireland in Dublin, Ireland .

Written in English

- Foreign exchange -- Mathematical models.,
- Balance of payments -- Mathematical models.,
- Prices -- Mathematical models.

**Edition Notes**

Statement | by Michael Moore. |

Series | Technical paper ; |

Classifications | |
---|---|

LC Classifications | HG3823 .M66 1986 |

The Physical Object | |

Pagination | 21, [5] p. |

Number of Pages | 21 |

ID Numbers | |

Open Library | OL2339140M |

LC Control Number | 86231045 |

degree of PTM, an exchange rate depreciation has little effect on the relative price of imported goods facing domestic consumers. This weakens the allocative effects of exchange rate changes, compared with a situation where prices are set in the seller’s currency (where pass-through of exchange rates to prices would be immediate). While P is fixed for the period, e is not, so a within-period change in the nominal exchange rate will alter the relative price between home and foreign goods. This is the basis of the ‘expenditure-switching’ effect of the exchange rate stressed in the Mundell–Fleming model. Exchange-rate dynamics under stochastic regime shifts A unified approach The analysis works with a two-country monetary model of the exchange rate, in which the (log) spot exchange rate at time t,x(t), is defined as the price stickiness induces mean reversion in fundamentals. EXPECTATIONS AND EXCHANGE RATE DYNAMICS I i65 We note that the long-run equilibrium exchange rate implied by (8) is5 e= - + (l/8)[Crr* + (1 - 7)y - u], (9) where f is defined in (5). From (9) it is apparent that the long-run exchange rate depends with the conventional homogeneity properties on monetary variables, but obviously on real variables.

very different effects than the more conventional exchange rate models in which prices are set in the currency of the seller. For instance, in the presence of a significant degree of PTM, an exchange rate depreciation has little effect on the relative price of imported goods facing domestic consumers. Aside from factors such as interest rates and inflation, the currency exchange rate is one of the most important determinants of a country's relative level of economic ge rates . V.3 Summary: Fundamental Forecasting Steps (1) Selection of Model (for example, PPP model) used to generate the forecasts. (2) Collection of St, Xt (in the case of PPP, exchange rates and CPI data needed.) (3) Estimation of model, if needed (regression, other methods). MOORE, MICHAEL J., `Exchange Rate Dynamics, Relative Price Stickiness and Wealth Effects in an Optimising Model,' Central Bank of Ireland Technical Paper 9/RT/86, MOORE, 1`11CHAEL J., `Inventories in the Open Economy Macro Model: A Disequilibrium Analysis,' Review of Economic Studies, , forthcoming (a).

The exchange rate has an important relationship to the price level because it represents a link between domestic prices and foreign prices. For example, ignoring taxes, subsidies and shipping costs, the price of wheat in Canada must equal the exchange rate (price of the U.S. dollar in terms of the Canadian dollar) times the U.S. dollar price of. Using data on US bilateral real exchange rates we find that the fluctuations in the relative wedge between retail prices and traded goods prices at-the-dock account for on average between 30 and. All else being equal (assuming no other costs and only taking exchange rates into account), the price of California almonds in Canada would increase from about C$ (i.e., approx. US$7 x An Empirical Analysis of Exchange Rate Dynamics and Pass-Through Effects on Domestic Prices in Ghana George Adu Department of Economics, Kwame Nkrumah University of Science and Technology, Kumasi, Ghana. Email: @; [email protected] Amin Karimu Department of Economics, Umea University, Umea, Sweden.

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