International Financial Market Integration, Asset Compositions, and the Falling Exchange Rate Pass-Through

43 Pages Posted: 21 Jun 2016

See all articles by Almira Buzaushina

Almira Buzaushina

International Monetary Fund (IMF)

Zeno Enders

University of Heidelberg

Mathias Hoffmann

Deutsche Bundesbank

Date Written: 2015

Abstract

This paper provides an explanation for the observed decline of the exchange rate pass-through into import prices by modeling the effects of financial market integration on the optimal choice of the pricing currency in the context of rigid nominal goods prices. Contrary to previous literature, we take the interdependence of this choice with the optimal portfolio choice of internationally traded financial assets explicitly into account. In particular, price setters move towards more localcurrency pricing and portfolios include more foreign debt assets following increased financial integration. Both predictions are in line with novel empirical evidence.

Keywords: exchange rate pass-through, financial integration, portfolio home bias, international price setting

JEL Classification: F41, F36, F31

Suggested Citation

Buzaushina, Almira and Enders, Zeno and Hoffmann, Mathias, International Financial Market Integration, Asset Compositions, and the Falling Exchange Rate Pass-Through (2015). Bundesbank Discussion Paper No. 17/2015. Available at SSRN: https://ssrn.com/abstract=2797042

Almira Buzaushina (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Zeno Enders

University of Heidelberg ( email )

Mathias Hoffmann

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

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