Nominal Rigidities and Exchange Rate Pass-Through in a Structural Model of a Small Open EconomySteven Ambler (), Ali Dib and Nooman Rebei Staff Working Papers from Bank of Canada Abstract: The authors analyze exchange rate pass-through in an estimated structural model of a small open economy that incorporates three types of nominal rigidity (wages and the prices of domestically produced and imported goods) and eight different structural shocks. The model is estimated using quarterly data from Canada and the United States. It predicts a remarkably similar dynamic relationship between the nominal exchange rate and prices in response to the different structural shocks: the nominal exchange rate overshoots its long-run level, and changes in the nominal exchange rate are passed through slowly to the domestic price level. The authors show that, although pricing to market (the slow adjustment of the domestic-currency prices of imported goods) is necessary to generate slow pass-through to the prices of imported goods, it is not necessary to generate slow pass-through to the overall price level. Sticky domestic wages also generate slow exchange rate pass-through, even when the prices of imported goods adjust instantaneously to changes in the exchange rate. Keywords: Business fluctuations and cycles; Economic models; Exchange rates; Inflation and prices; International topics (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:03-29 Access Statistics for this paper More papers in Staff Working Papers from Bank of Canada 234 Wellington Street, Ottawa, Ontario, K1A 0G9, Canada. Contact information at EDIRC. |
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