The Signaling Effect of Exchange Rates: Pass-Through under Dispersed Information

descriptionPublicationkeyboard_double_arrow_right Article , Other literature type , Preprint 01 Jan 2012 English Publisher:Elsevier BVJournal:SSRN Electronic Journal (eissn: 1556-5068,

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Authors: Waldyr Areosa; Marta Areosa;

doi: 10.2139/ssrn.2126626

The Signaling Effect of Exchange Rates: Pass-Through under Dispersed Information

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Abstract

We examine exchange-rate pass-through (ERPT) to prices in a model of dispersed information in which the nominal exchange rate imperfectly conveys information about the underlying fundamentals. If the information is complete, ERPT is also complete. Under dispersed information, we derive conditions under which our model displays three properties that are consistent with the stylized facts of ERPT. First, ERPT lies between 0 and 1 (incomplete ERPT). Second, ERPT is usually higher for imported goods prices than for consumer prices (exchange rate-consumer price puzzle). Third, there is a link between ERPT and macroeconomic stability.

Related Organizations

Pontifical Catholic University of Rio de Janeiro
Brazil
Central Bank of Brazil
Brazil

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