Modeling Exchange Rate Pass-Through after Large Devaluations

40 Pages Posted: 27 Oct 2005

See all articles by Ariel T. Burstein

Ariel T. Burstein

University of California, Los Angeles (UCLA) - Department of Economics

Martin Eichenbaum

Northwestern University; National Bureau of Economic Research (NBER)

Sergio T. Rebelo

Northwestern University - Kellogg School of Management; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Date Written: September 2005

Abstract

Large devaluations are generally associated with large declines in real exchange rates. We develop a model which embodies two complementary forces that account for the large declines in the real exchange rate that occur in the aftermath of large devaluations. The first force is sticky nontradable goods prices. The second force is the impact of real shocks that often accompany large devaluations. We argue that sticky nontradable goods prices generally play an important role in explaining post-devaluation movements in real exchange rates. However, real shocks can sometimes be primary drivers of real exchange rate movements.

Keywords: Exchange rate, devaluations, pass-through, sticky prices

JEL Classification: F31

Suggested Citation

Burstein, Ariel T. and Eichenbaum, Martin and Tavares Rebelo, Sergio, Modeling Exchange Rate Pass-Through after Large Devaluations (September 2005). CEPR Discussion Paper No. 5250. Available at SSRN: https://ssrn.com/abstract=837324

Ariel T. Burstein

University of California, Los Angeles (UCLA) - Department of Economics ( email )

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Martin Eichenbaum

Northwestern University ( email )

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National Bureau of Economic Research (NBER)

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Sergio Tavares Rebelo (Contact Author)

Northwestern University - Kellogg School of Management ( email )

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Centre for Economic Policy Research (CEPR)

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United Kingdom

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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