Flexible Exchange Rates and Traded Goods Prices: A Theory of the Short-Run

The volatility displayed by floating exchange rates has revived interest in the relationship between exchange rates and traded goods prices. This paper aims to provide a theory of exchange rates and traded goods prices in the short-run. In particular, it examines how various factors can cause exchange rate pass-through to be incomplete in the short-run but not in the long-run. These include: (i) menu costs, (ii) the costs of changing supply, (iii) the dynamics of demand response to price changes, (iv) orderdelivery lags, (v) forward exchange cover, and (vi) the currency denomination of trade contracts. From a policy perspective, the presence of these factors could account for the often prolonged adjustment of trade balances to exchange rate changes, and the failure of exchange rate volatility to perceptibly affect the volume of international trade flows.


Issue Date:
Jun 01 1994
Publication Type:
Working or Discussion Paper
Language:
English
Total Pages:
18
Series Statement:
General Paper No. G-108




 Record created 2018-01-05, last modified 2018-01-22

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