Exchange Rate Pass-Through and the Welfare Effects of the Euro

63 Pages Posted: 30 Dec 1999 Last revised: 14 Oct 2010

See all articles by Michael B. Devereux

Michael B. Devereux

University of British Columbia (UBC) - Department of Economics; Centre for Economic Policy Research (CEPR)

Charles M. Engel

University of Wisconsin - Madison - Department of Economics; National Bureau of Economic Research (NBER); University of Washington - Department of Economics

Cédric Tille

Graduate Institute of International and Development Studies (HEI)

Multiple version iconThere are 2 versions of this paper

Date Written: October 1999

Abstract

This paper explores the implications of the European single currency within a simple sticky price intertemporal model. The main issue we focus on is how the euro may alter the responsiveness of consumer prices to exchange rate changes. Our central conjectures is that the acceptance of the euro will lead European prices to become more insulated from exchange-rate volatility, much the way U.S. consumer prices already are. We show that this has profound consequences for both the volatility and levels of macroeconomic aggregates in both the U.S. and Europe. We find that European welfare is enhanced, and, more surprisingly U.S. shares in Europe's good fortune. Alternative assumptions about how pricing behavior will change lead to different conclusions, but in all cases we can derive specific implications for expected levels and volatility of macroeconomic varialbes.

Suggested Citation

Devereux, Michael B. and Engel, Charles M. and Tille, Cedric, Exchange Rate Pass-Through and the Welfare Effects of the Euro (October 1999). NBER Working Paper No. w7382. Available at SSRN: https://ssrn.com/abstract=193792

Michael B. Devereux (Contact Author)

University of British Columbia (UBC) - Department of Economics ( email )

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Charles M. Engel

University of Wisconsin - Madison - Department of Economics ( email )

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Cedric Tille

Graduate Institute of International and Development Studies (HEI) ( email )

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Switzerland

HOME PAGE: http://sites.google.com/site/cedrictilleheid/home

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