Exchange rate pass-through; International macroeconomic synchronization; International trade in intermediate goods; Vertical integration; Finance; Economics and Econometrics
Abstract :
[en] We investigate the difficulties of the canonical open New Keynesian model to i) reproduce the observed exchange rate pass-through disconnect, i.e. a pass-through high for import prices and low for consumer prices, and ii) to generate international business cycle synchronization. The literature tackled them separately: i) strategic complementarities for exporting firms to mitigate the pass-through to consumer prices and ii) intermediate inputs trade to enhance cross-border spillovers. We prove that foreign intermediate inputs also efficiently address the pass-through dimension, but, unlike strategic complementarities, solve the exchange rate pass-through disconnect puzzle. These results carry over to the general equilibrium effects of a depreciation. Furthermore, we show analytically that both types of vertical integration weaken sharply the expenditure switching effect. This feature strengthens real synchronization in response to productivity and monetary policy shocks, but lowers it in response to private demand shocks, a point which complements the existing literature.
Disciplines :
Macroeconomics & monetary economics
Author, co-author :
de Walque, Gregory; National Bank of Belgium, Belgium
Lejeune, Thomas ; Université de Liège - ULiège > HEC Liège : UER > UER Economie ; National Bank of Belgium, Belgium
Rannenberg, Ansgar; National Bank of Belgium, Belgium
Wouters, Raf; National Bank of Belgium, Belgium
Language :
English
Title :
Low pass-through and international synchronization in general equilibrium: Reassessing vertical integration
We would like to thank the participants to the various seminars and conferences where the paper has been presented under the title: "Low pass-through and high spillovers in NOEM: What does help and what does not". Comments and remarks by Luca Dedola, Cedric Duprez, Jesper Linde, Tommaso Monacelli, Eva Ortega, Chiara Osbat, Massimiliano Pisani and Spyridon Sichlimiris are gratefully acknowledged. The co-editor and two anonymous referees provided a great help to improve the manuscript. We are fully responsible for any remaining error.
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