Openness, Imperfect Exchange Rate Pass-Through and Monetary Policy

52 Pages Posted: 20 Jan 2003

See all articles by Frank Smets

Frank Smets

European Central Bank (ECB); KU Leuven - Center for Economic Studies

Rafael Wouters

National Bank of Belgium

Multiple version iconThere are 2 versions of this paper

Date Written: February 2002

Abstract

This paper analyses the implications of imperfect exchange rate pass-through for optimal monetary policy in a linearised open-economy dynamic general equilibrium model calibrated to euro area data. Imperfect exchange rate pass through is modelled by assuming sticky import price behaviour. The degree of domestic and import price stickiness is estimated by reproducing the empirical identified impulse response of a monetary policy and exchange rate shock conditional on the response of output, net trade and the exchange rate. It is shown that a central bank that wants to minimise the resource costs of staggered price setting will aim at minimising a weighted average of domestic and import price inflation.

Keywords: Monetary Policy, Open Economies, Exchange Rate Pass-through

JEL Classification: E58, F41

Suggested Citation

Smets, Frank and Wouters, Rafael, Openness, Imperfect Exchange Rate Pass-Through and Monetary Policy (February 2002). Available at SSRN: https://ssrn.com/abstract=357326

Frank Smets (Contact Author)

European Central Bank (ECB) ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany
+49 69 1344 6550 (Phone)
+49 69 1344 6575 (Fax)

KU Leuven - Center for Economic Studies ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

Rafael Wouters

National Bank of Belgium ( email )

Brussels, B-1000
Belgium
+32 2 221 5441 (Phone)
+32 2 221 3162 (Fax)

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